Sive Morten
Special Consultant to the FPA
- Messages
- 18,564
Fundamentals
Well, this wee was relatively quiet as we've got no big shifts on political arena, France elections are not over yet and markets mostly were watching for CPI release and ECB meeting. But neither former nor latter have brought big surprises.
Market overview
The U.S. consumer price index rose 1.2% last month, the biggest increase in 16-1/2 years and cementing the case for a 50 basis points interest rate hike from the Federal Reserve next month. The acceleration in prices reported by the Labor Department on Tuesday culminated in annual inflation rising at its fastest pace since the end of 1981. But there is cautious hope that the worst of the post-pandemic inflation surge is behind. Monthly underlying inflation pressures moderated as goods prices, excluding food and energy, dropped by the most in two years. Further declines in the so-called core goods prices are likely as demand shifts back to services amid the rolling back of COVID-19 restrictions on businesses.
In the 12 months through March, the CPI accelerated 8.5%, the largest year-on-year gain since December 1981, after a 7.9% jump in February. It was the sixth straight month of annual CPI readings north of 6%. Last month's increase in inflation was in line with economists' expectations. The core CPI rose 6.5% in the 12 months through March, the largest gain since August 1982, after advancing 6.4% in February.
There is also a sense that consumers, confronted with declining purchasing power, are becoming more price conscious, which could make it harder for businesses to pass on higher price. Inflation-adjusted weekly earnings fell 1.1% in March.
While U.S. 10-year Treasury yields pulled back from their highs, they are up almost 45 basis points so far this month. More disconcerting for equities is the move in real or inflation-adjusted yields, with the yield on the 10-year U.S. Treasury Inflation-Protected Securities (TIPS) approaching 0% . In Europe, German Bund yields climbed to almost 0.88%, their highest level since 2015 , British gilt yields rose to fresh multi-year highs .
Germany's ZEW economic research institute said its economic sentiment index fell to -41.0 points from -39.3 in March, declining less than expected. An index for current conditions fell to -30.8 from -21.4. The consensus forecast was for a reading of -35.0.
German business morale also plummeted in March as companies worried about rising energy prices, driver shortages and the stability of supply chains in the wake of the war in Ukraine. Separate data on Tuesday showed Germany's annual harmonised consumer price inflation (HICP) rate ran at 7.6% in March. Wholesale prices rose by 22.6% on the year, the highest annual rate since the calculation of the data began in 1962.
The latest warnings from Japanese policymakers, with Prime Minister Fumio Kishida saying on Tuesday that rapid currency moves are undesirable, failed to shore up the yen, which has shed over 3% this month. Japanese Finance Minister Shunichi Suzuki warned on Tuesday that the government is watching yen moves and their impact on the economy "with a sense of urgency".
An admission from a central banker that rapid policy tightening may cause a hard landing for economic growth -- Federal Reserve Governor Chris Waller described rate hikes as a "blunt force" tool that may act like a "hammer", causing collateral damage to the economy. The hope now is that the threat of rate hikes and tighter financial conditions will start to put a lid on inflation. Inflation pressures are everywhere, in fact, even in Japan which earlier in the day reported record wholesale price growth, while Britain's three-month jobless rate fell to 3.8% -- it last fell below that level in 1974.
The US labour market remains extraordinarily strong. That, together with inflation around a forty-year high, is putting significant pressure on the Fed to reduce the level of monetary accommodation quickly. Initial jobless claims in the latest week were just 166K – the joint lowest (with the week ending March 19) since November 1968. This statistic is all the more striking given that the US labour force is around twice as large as it was in 1968. There is a growing likelihood that the Fed may tighten rates by 50bps at its meeting on 4 May, and it is likely to begin the process of winding down its balance sheet. This process, often referred to as quantitative tightening, looks set to occur at a faster pace than previously thought. Against the backdrop of Fed policy tightening and Ukraine, Fathom is currently cautious on risky assets.
The European Central Bank stuck to plans on Thursday to finally end its stimulus programme in the third quarter but gave no further clues on its schedule, stressing uncertainties linked to the war in Ukraine as well as the path of inflation. Euro zone bond yields fell after the policy statement, with German two-year bond yields falling more than 10 bps on the day. The reduction of rate hike bets also hurt the euro, which tumbled to a two-year low at $1.07580 and hit its lowest level versus sterling since March 7, at 82.75 pence. Money markets also trimmed expectations of rate hikes by the end of the year.
Futures dated to the ECB's July meeting price in around 15 bps worth of hikes, down from 20 bps earlier on Thursday.
The European Central Bank confirmed plans on Thursday to end its hallmark stimulus scheme in the third quarter, worried that high inflation could become entrenched, even as the war in Ukraine left the outlook exceptionally uncertain. The ECB has been unwinding support at a glacial pace, far slower than its peers, worried that growth could quickly crumble as the war, sky-high energy prices and the risk of losing access to Russian gas batter an already fragile economy.
Even on Thursday it maintained a non-committal tone, avoiding any firm pledge beyond the end of bond buys, stressing that policy is flexible and can quickly change.
But Lagarde also delivered a stark warning on inflation, noting that longer-term inflation expectations were showing early signs of moving above the ECB's 2% target.
Such a shift, called de-anchoring in central bank-speak, is a worrisome sign, suggesting markets' loss of confidence in the bank's ability to maintain price stability.
While Lagarde largely avoided discussion of any rate hike, her comments that it could come "a week" or months after the end of bond buys suggest that policymakers could discuss the issue at their late July meeting. Sources close to the discussion agreed, noting that a July rate move is still on the table but there were divisions in the Governing Council about risks, including on longer-term inflation prospects.
Economists meanwhile zeroed in on a later move but took note that Lagarde did not rule out a change in the minus 0.5% deposit rate during the summer, just before policymakers leave for their holidays.
Markets now price in 63 basis points of rate hikes before the end of the year, a modest retreat compared with 70 basis points priced in prior to the meeting. The euro meanwhile fell sharply as some expected Lagarde to unveil a more decisive schedule to tighten policy.
Among the world's most cautious central banks, the ECB is already lagging far behind nearly all its major peers, many of which started raising rates last year. In the past two days alone, the central banks of Canada, South Korea and New Zealand have all increased the cost of borrowing. The U.S Federal Reserve is meanwhile expected to raise rates eight times or more over the next two years, leading the world in policy tightening.
Part of the ECB's caution is that the drivers of high inflation now are likely to weigh on price growth further out. Energy prices driven higher by the Ukraine war are draining household savings and uncertainty caused by the conflict is halting corporate investment. Banks are also tightening access to credit as they naturally do during wars, potentially exacerbating the downturn.
Analysts at Goldman Sachs put the cumulative net outflow from euro zone fixed income markets since 2014 at almost 3 trillion euros. The reversal appears to be underway.
Net foreign inflows into Treasuries rose for a fourth straight month in February in the amount of $75.3 billion, data from the U.S. Treasury department showed on Friday. Of that, private overseas investors bought $91.9 billion in Treasuries and foreign official institutions sold $16.2 billion. Foreigners have bought Treasuries in 10 of the last 12 months, including a record net monthly purchase of $118 billion in March 2021.
The overall foreign buying came as U.S. yields rose. U.S. benchmark 10-year Treasury yields peaked at 2.0650% in February, reaching the highest level since July 2019, and ended the month at 1.8216%, up about 4 basis points from the end of January.
Optimism among fund managers over global economic growth has hit an all-time low while concerns of possible stagflation have risen to the highest since August 2008, a monthly survey by investment bank BoFA Securities showed on Tuesday. The survey, which took the views of firms managing a total of more than $833 billion, is one of the biggest regular tests of fund manager views and comes as inflationary pressures rise even as the risk of recession increases in major economies.
Asked about their expectations for global growth in the coming months, a net 71% of survey respondents were pessimistic about prospects, the most since the survey records began in the early 1990s. The European edition of the survey found investors continuing to cut their European growth projections, with a net 81% of survey respondents expecting the region's economy to weaken over the coming year compared with 69% in the March edition.
Participants in the survey expect the U.S. Federal Reserve to raise interest rates by as many as seven times in the current cycle, compared with four times in the previous edition, with a majority of investors expecting inflation to soften over the next 12 months. Global profit expectations deteriorated to their weakest levels since March 2020, BoFA said.
In terms of regional stock market allocations, investors were most bullish on U.S. equities, while European and UK equities were the top bearish bets. Despite the growing recession concerns, a majority of survey respondents expect European equities to mark new highs in the currency economic cycle, with less than 30% of survey respondents expecting market weakness. The UK remains the favourite equity market in Europe, while Germany and Italy are the least preferred, the European edition of the survey said.
British house prices in February were 10.9% higher than a year earlier, up from a 10.2% increase in January and one of the biggest annual increases in more than 15 years, official figures showed on Wednesday. Annual house price inflation in Britain hit a record 13.5% in June 2021 and 11.5% in September, due to expiring deadlines for a temporary reduction in purchase taxes.
British lenders expect loan defaults to rise over the coming months and also plan to rein in mortgage lending by the greatest amount since the early days of the COVID-19 pandemic, a Bank of England survey showed on Thursday. The BoE's quarterly credit conditions survey showed lenders expect more defaults on mortgages, unsecured consumer lending and business loans in the three months to the end of May, although outright losses on mortgage lending were expected to remain stable.
The dollar rose to a two-decade peak against the yen and kept close to a two-year high to the euro on Friday, as more hawkish comments from Federal Reserve officials reinforced expectations for faster U.S. policy tightening. New York Fed President John Williams said on Thursday that the U.S. Federal Reserve should reasonably consider raising interest rates by a half percentage point at its next meeting in May, which was seen as a further sign that even more cautious policymakers are on board with bigger rate hikes.
To be continued...
Well, this wee was relatively quiet as we've got no big shifts on political arena, France elections are not over yet and markets mostly were watching for CPI release and ECB meeting. But neither former nor latter have brought big surprises.
Market overview
The U.S. consumer price index rose 1.2% last month, the biggest increase in 16-1/2 years and cementing the case for a 50 basis points interest rate hike from the Federal Reserve next month. The acceleration in prices reported by the Labor Department on Tuesday culminated in annual inflation rising at its fastest pace since the end of 1981. But there is cautious hope that the worst of the post-pandemic inflation surge is behind. Monthly underlying inflation pressures moderated as goods prices, excluding food and energy, dropped by the most in two years. Further declines in the so-called core goods prices are likely as demand shifts back to services amid the rolling back of COVID-19 restrictions on businesses.
"The Fed will take a tiny bit of comfort from today's report, but it still has much work to do to restore price stability," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.
In the 12 months through March, the CPI accelerated 8.5%, the largest year-on-year gain since December 1981, after a 7.9% jump in February. It was the sixth straight month of annual CPI readings north of 6%. Last month's increase in inflation was in line with economists' expectations. The core CPI rose 6.5% in the 12 months through March, the largest gain since August 1982, after advancing 6.4% in February.
There is also a sense that consumers, confronted with declining purchasing power, are becoming more price conscious, which could make it harder for businesses to pass on higher price. Inflation-adjusted weekly earnings fell 1.1% in March.
"We expect demand for goods to waver as spending pivots back toward services, and this transition should temper goods inflation," said Michael Pugliese, an economist at Wells Fargo in New York. "Pent-up demand for travel should lead to a few more months of solid gains for airfare and lodging prices, but there will likely be less scope for catch-up come autumn."
While U.S. 10-year Treasury yields pulled back from their highs, they are up almost 45 basis points so far this month. More disconcerting for equities is the move in real or inflation-adjusted yields, with the yield on the 10-year U.S. Treasury Inflation-Protected Securities (TIPS) approaching 0% . In Europe, German Bund yields climbed to almost 0.88%, their highest level since 2015 , British gilt yields rose to fresh multi-year highs .
Germany's ZEW economic research institute said its economic sentiment index fell to -41.0 points from -39.3 in March, declining less than expected. An index for current conditions fell to -30.8 from -21.4. The consensus forecast was for a reading of -35.0.
"The ZEW Indicator of Economic Sentiment remains at a low level. The experts are pessimistic about the current economic situation and assume that it will continue to deteriorate," ZEW President Achim Wambach said in a statement. The decline in inflation expectations, which cuts the previous month's considerable increase by about half, gives some cause for hope. However, the prospect of stagflation over the next six months remains," he added.
German business morale also plummeted in March as companies worried about rising energy prices, driver shortages and the stability of supply chains in the wake of the war in Ukraine. Separate data on Tuesday showed Germany's annual harmonised consumer price inflation (HICP) rate ran at 7.6% in March. Wholesale prices rose by 22.6% on the year, the highest annual rate since the calculation of the data began in 1962.
"Germany is threatened with recession," said Thomas Gitzel, chief economist at VP Bank. "Germany, with its export-heavy industry and dependence on intermediate goods from Asia, is without weather protection in a raging logistics hurricane."
The latest warnings from Japanese policymakers, with Prime Minister Fumio Kishida saying on Tuesday that rapid currency moves are undesirable, failed to shore up the yen, which has shed over 3% this month. Japanese Finance Minister Shunichi Suzuki warned on Tuesday that the government is watching yen moves and their impact on the economy "with a sense of urgency".
"Despite repeated verbal intervention over the past few weeks from Japanese policymakers, USD/JPY has continued to rise alongside higher U.S. yields," Goldman Sachs analysts wrote in a note. "The odds of direct FX intervention are rising, in our view," and "should increase significantly once USD/JPY enters the 127-130 range," they said.
An admission from a central banker that rapid policy tightening may cause a hard landing for economic growth -- Federal Reserve Governor Chris Waller described rate hikes as a "blunt force" tool that may act like a "hammer", causing collateral damage to the economy. The hope now is that the threat of rate hikes and tighter financial conditions will start to put a lid on inflation. Inflation pressures are everywhere, in fact, even in Japan which earlier in the day reported record wholesale price growth, while Britain's three-month jobless rate fell to 3.8% -- it last fell below that level in 1974.
The US labour market remains extraordinarily strong. That, together with inflation around a forty-year high, is putting significant pressure on the Fed to reduce the level of monetary accommodation quickly. Initial jobless claims in the latest week were just 166K – the joint lowest (with the week ending March 19) since November 1968. This statistic is all the more striking given that the US labour force is around twice as large as it was in 1968. There is a growing likelihood that the Fed may tighten rates by 50bps at its meeting on 4 May, and it is likely to begin the process of winding down its balance sheet. This process, often referred to as quantitative tightening, looks set to occur at a faster pace than previously thought. Against the backdrop of Fed policy tightening and Ukraine, Fathom is currently cautious on risky assets.
"The United States economy seems to be isolated enough and showing enough signs of inflation that the Fed is going to continue maintaining a very, very hawkish line and acting on it, and by doing so, of course, improving the dollar value," said Juan Perez, director of trading, at Monex USA in Washington.
The European Central Bank stuck to plans on Thursday to finally end its stimulus programme in the third quarter but gave no further clues on its schedule, stressing uncertainties linked to the war in Ukraine as well as the path of inflation. Euro zone bond yields fell after the policy statement, with German two-year bond yields falling more than 10 bps on the day. The reduction of rate hike bets also hurt the euro, which tumbled to a two-year low at $1.07580 and hit its lowest level versus sterling since March 7, at 82.75 pence. Money markets also trimmed expectations of rate hikes by the end of the year.
Futures dated to the ECB's July meeting price in around 15 bps worth of hikes, down from 20 bps earlier on Thursday.
"Today's statement makes more than two hikes in 2022 almost impossible, whereas part of the market expected something like end of the (asset purchase programme) in June announced today and consequently possibly three hikes," said Louis Harreau, ECB watcher at Credit Agricole. So the communique kind of removes this extreme pricing."
The European Central Bank confirmed plans on Thursday to end its hallmark stimulus scheme in the third quarter, worried that high inflation could become entrenched, even as the war in Ukraine left the outlook exceptionally uncertain. The ECB has been unwinding support at a glacial pace, far slower than its peers, worried that growth could quickly crumble as the war, sky-high energy prices and the risk of losing access to Russian gas batter an already fragile economy.
Even on Thursday it maintained a non-committal tone, avoiding any firm pledge beyond the end of bond buys, stressing that policy is flexible and can quickly change.
"The downside risks to the growth outlook have increased substantially as a result of the war in Ukraine," ECB President Christine Lagarde said. "We will maintain optionality, gradualism and flexibility in the conduct of our monetary policy," she said, speaking from home where she is recovering from the coronavirus.
But Lagarde also delivered a stark warning on inflation, noting that longer-term inflation expectations were showing early signs of moving above the ECB's 2% target.
Such a shift, called de-anchoring in central bank-speak, is a worrisome sign, suggesting markets' loss of confidence in the bank's ability to maintain price stability.
"The last thing that we want is to see inflation expectations at the risk of de-anchoring," Lagarde said, adding that "close monitoring" would be required.
While Lagarde largely avoided discussion of any rate hike, her comments that it could come "a week" or months after the end of bond buys suggest that policymakers could discuss the issue at their late July meeting. Sources close to the discussion agreed, noting that a July rate move is still on the table but there were divisions in the Governing Council about risks, including on longer-term inflation prospects.
Economists meanwhile zeroed in on a later move but took note that Lagarde did not rule out a change in the minus 0.5% deposit rate during the summer, just before policymakers leave for their holidays.
"We still believe the ECB is unlikely to hike in July, but Lagarde wanted to make clear that the option was available," Pictet strategist Frederik Ducrozet said.
Markets now price in 63 basis points of rate hikes before the end of the year, a modest retreat compared with 70 basis points priced in prior to the meeting. The euro meanwhile fell sharply as some expected Lagarde to unveil a more decisive schedule to tighten policy.
Carsten Brzeski, an economist at ING, also saw September as the more likely lift-off date. "We expect the ECB to stop net asset purchases in July and start hiking interest rates in September," he said. The ECB will definitely not get ahead of the central banks’ pack any time soon in terms of policy normalisation. It will be normalisation at a snail’s pace."
Among the world's most cautious central banks, the ECB is already lagging far behind nearly all its major peers, many of which started raising rates last year. In the past two days alone, the central banks of Canada, South Korea and New Zealand have all increased the cost of borrowing. The U.S Federal Reserve is meanwhile expected to raise rates eight times or more over the next two years, leading the world in policy tightening.
Part of the ECB's caution is that the drivers of high inflation now are likely to weigh on price growth further out. Energy prices driven higher by the Ukraine war are draining household savings and uncertainty caused by the conflict is halting corporate investment. Banks are also tightening access to credit as they naturally do during wars, potentially exacerbating the downturn.
"Recession in Europe is already our base case, but its magnitude and duration crucially depend on the nature of further sanctions on Russia. As a full energy embargo is becoming more likely, so is the worst-case recession scenario. We believe as the growth shock becomes more evident in the data over the next few weeks, the ECB's focus will likely shift away from high inflation towards trying to limit economic and market distress as the war and its consequences continues to ripple through the system. Contrary to market pricing, we do not expect the ECB to hike rates until Q4 this year or early 2023, said Fidelity International.
"Europe is different and the ECB is different. Instead of any panic reaction, the ECB continues with its very gradual normalisation, which in our view is bringing an end to net asset purchases over the summer and an end to the era of negative interest rates before the end of the year, ING said
Analysts at Goldman Sachs put the cumulative net outflow from euro zone fixed income markets since 2014 at almost 3 trillion euros. The reversal appears to be underway.
"A reversal of these persistent outflows could have important implications for the euro," wrote Goldman strategist Zach Pandl last month when he and his team raised their euro forecast to a bullish and out-of-consensus $1.20 over 12 months and $1.30 by the end of 2024. The euro was at $1.09 on Wednesday.
Net foreign inflows into Treasuries rose for a fourth straight month in February in the amount of $75.3 billion, data from the U.S. Treasury department showed on Friday. Of that, private overseas investors bought $91.9 billion in Treasuries and foreign official institutions sold $16.2 billion. Foreigners have bought Treasuries in 10 of the last 12 months, including a record net monthly purchase of $118 billion in March 2021.
The overall foreign buying came as U.S. yields rose. U.S. benchmark 10-year Treasury yields peaked at 2.0650% in February, reaching the highest level since July 2019, and ended the month at 1.8216%, up about 4 basis points from the end of January.
Optimism among fund managers over global economic growth has hit an all-time low while concerns of possible stagflation have risen to the highest since August 2008, a monthly survey by investment bank BoFA Securities showed on Tuesday. The survey, which took the views of firms managing a total of more than $833 billion, is one of the biggest regular tests of fund manager views and comes as inflationary pressures rise even as the risk of recession increases in major economies.
Asked about their expectations for global growth in the coming months, a net 71% of survey respondents were pessimistic about prospects, the most since the survey records began in the early 1990s. The European edition of the survey found investors continuing to cut their European growth projections, with a net 81% of survey respondents expecting the region's economy to weaken over the coming year compared with 69% in the March edition.
Participants in the survey expect the U.S. Federal Reserve to raise interest rates by as many as seven times in the current cycle, compared with four times in the previous edition, with a majority of investors expecting inflation to soften over the next 12 months. Global profit expectations deteriorated to their weakest levels since March 2020, BoFA said.
In terms of regional stock market allocations, investors were most bullish on U.S. equities, while European and UK equities were the top bearish bets. Despite the growing recession concerns, a majority of survey respondents expect European equities to mark new highs in the currency economic cycle, with less than 30% of survey respondents expecting market weakness. The UK remains the favourite equity market in Europe, while Germany and Italy are the least preferred, the European edition of the survey said.
British house prices in February were 10.9% higher than a year earlier, up from a 10.2% increase in January and one of the biggest annual increases in more than 15 years, official figures showed on Wednesday. Annual house price inflation in Britain hit a record 13.5% in June 2021 and 11.5% in September, due to expiring deadlines for a temporary reduction in purchase taxes.
British lenders expect loan defaults to rise over the coming months and also plan to rein in mortgage lending by the greatest amount since the early days of the COVID-19 pandemic, a Bank of England survey showed on Thursday. The BoE's quarterly credit conditions survey showed lenders expect more defaults on mortgages, unsecured consumer lending and business loans in the three months to the end of May, although outright losses on mortgage lending were expected to remain stable.
The dollar rose to a two-decade peak against the yen and kept close to a two-year high to the euro on Friday, as more hawkish comments from Federal Reserve officials reinforced expectations for faster U.S. policy tightening. New York Fed President John Williams said on Thursday that the U.S. Federal Reserve should reasonably consider raising interest rates by a half percentage point at its next meeting in May, which was seen as a further sign that even more cautious policymakers are on board with bigger rate hikes.
"Williams spoke openly of the need to move rates more swiftly and above neutral," further buoying the dollar, Tim Riddell, a macro strategist at Westpac wrote in a client note. By contrast, the ECB "revealed a more dovish reaction function to the inflation news than the market had discounted," he said.
To be continued...