The economic week that was

In short: global sharemarkets continued their grotesque rise this week.

In the US, and the ugliest it’s been in years, the normally halfway decent S&P500 was ahead for the week by over 3% (Friday morning) in New York.

All of its 11 ugly sisters (but for energy) contributing to the gains.

Tech, OFC, remains the Elephant-man in the room. And then, rising above everything else with oozing Lovecraftian dread soar the ill-named Magnificent 7.

After dropping off the edge of the planet last year, US shares are now only a single digit (circa 8%) below their all time hideous record highs, attained at the height of the last pandemic.

AMP’s Diana Mousina, the sage ex-Louis Vuitton Russian-speaking, Uzbekistan-born deputy chief economist, mother and legend told Stockhead:

“Shares are rising on the positive impact of artificial intelligence (to AI-specific firms, the broader tech sector and more broadly to other sectors which could experience a productivity boost), expectations that the Fed is close to the end of its tightening cycle (US bond yields are below their cyclical highs) and expectations that the US recession won’t occur until later in 2024 (previous forecasts of a US recession were all based in 2023).”

The stench of stimulus (monetary, fiscal, emotional) out of Beijing  late in the week helped revive Chinese markets and did its bit for the giant part of our market which gets emotional whenever the words stimulus and China appear in a sentence.

All up mainland markets rose 0.8% over the week, having strung together a catalogue of weekly failures on depressing macro data, while at home cooper, iron ore, nickel and steel all found flight on the news of PBoC rate cuts, the resources sector helped drive local shares higher by around 1.2% for the week. Only healthcare losing out.

China + stimulus also = strong Australian dollar. I found it loitering with intent just under 69 US cents and almost called the currency cops.

There’s not a heap of rational reasons that EU markets were up a combined 1.9%.  At least Japanese shares i- soaring at 3.3%, have the support of Warren Buffett, Charlie Umber and Berkshire Hathaway.  They at least have an excuse for overshooting to 1989 highs.

Accelerating European markets are starting to remind me of American markets –  perpetually confusing the idea of ‘nothing to lose’ with ‘so very, very, very much to lose.’

Central banking

Back to China where May macro data actually made April look good (it wasn’t).

Fixed asset investment is a problem. (down to 4% YTD).

FDI, private investment, property, youth unemployment, equity markets, industrial production, geopolitical tension, exports, consumer spending, manufacturing output and a gradual diminishing of the freewheeling hopes for a better life so present under former president Hu Jintao are all likely making the endless circle of Communist Party meetings absolute hell for the responsible officials. Policymakers have one trick in the book for this situation…

So, as the rest of the world hiked or paused, utterly unsurprisingly, the PBoC trimmed a key lending rate on Thursday.

The seven-day reverse repo rate is now shorter by 10 basis points, but t’was followed up with a cut in the medium-term lending rate.

Julian Evans-Pritchard, Capital Economics’ point man on China said the need for more of this economic support is ‘significant.’.

There is one bright spot however – the production of electric vehicles in China is chugging along beautifully despite the White House’s best efforts to starve China of semiconductors. Delivery numbers for local brands are ramping up substantially compared to a year ago.

In a striking divergence from the already unhinged US Federal Reserve the European Central Bank (ECB) has hoisted interest rates to 3.5% overnight and flashed enough muscle to show that it will increase them again in July.

The ECB’s president Christine Lagarde made it abundantly clear the bank will not stop firing until sticky inflation is dead in the dirt.

Inflation has been coming down but is projected to remain too high for too long. The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It therefore today decided to raise the three key ECB interest rates by 25 basis points.

The decision ignored the notion of a “pause” and signalled more hikes to come, with the rate on its main refinancing operations is now at 4% while the deposit facility increased to a 22-year high of 3.5%.

The ECB’s decision on Thursday to increase its benchmark deposit rate to its highest level in 22 years came as it raised its inflation forecast and trimmed its growth prediction for the next three years.

Lagarde held another terrific press conference to ensure everyone knows they’re “very likely” to tighten again on July 27.

In the States, the FOMC hit “pause” and left the Fed funds rate unchanged at 5.125%.

The accompanying statement suggested officials are enjoying a surer confidence in the US economy and learning to accept living with the ongoing uncertainty of where US inflation is going.

The May CPI suggests 11 straight months of decelerating price growth from last June’s 40-year, 9.1% yr peak.

Westpac’s chief economist and Australia’s unofficial global rates whisperer Bill Evans explains that the challenge for Fed officials is that annual CPI inflation is still twice the FOMC’s medium-term 2% target (at 4%) and core inflation is higher still at 5.3% yr.

“Consequently, FOMC members now project a year-end peak for the Fed funds rate in 2023 of 5.6%, 50bps higher than March.

“(FOMC) members believe it will prove necessary to keep policy restrictive for more than 2.5 years from today,” Evans said on Friday.

“On balance, the FOMC’s June decision leads us to believe one more 25bp hike in July is the most likely course – come early-2024 we expect the case to have been made for rate cuts.”

May’s awful employment wins

Following the week’s shock-horror crush of new jobs, Westpac led the pundits in upwardly revising their predictions for the current cycle. The bank now expects a hike at the July and August meetings, taking the cash rate to 4.60%.

“The first rate cut is also now expected to be delayed until May 2024, previously February 2024.

“The implications for growth and the labour market are material, with GDP growth of just 0.6% yr and 1.0% yr forecast for 2023 and 2024, and consequently the unemployment rate seen at 5.3% by end-2024,” according to Evans.

Regarding the May jobs data, Dwyfor Evans, (PHD) head of APAC macro strategy at State Street Global Markets says there’s now “an almost 50% probability” of a rate hike baked into feelings for the next RBA decision in July.

“Although a notoriously noise data series, this does offer further evidence of a strong labour market with particular emphasis on the rise in the participation rate. The RBA has bought optionality on additional cash rate hikes with its recent remarks and data continue to vindicate this,” Dr Dwyfor said.

With property prices back on the rise, it certainly appears that the nation’s net migration recovery continues apace.

This week the Bureau of Stats permanent and long-term net arrivals were still coming in at an exciting 35,000 new Aussies per month average pace. Bad for renters, good for home owners.

In the States, retail sales surprised to the upside, but with lots of holes – like building materials.

And as if to prove what a chit job it is being a central bonker – US initial jobless claims remain at their post-pandemic peak, levels not seen since 2021, yet are also wallowing at near historic lows.

Also the NAB business survey dropped – business conditions falling by 7pts to +8 over May. Stripping out the technical waffle – the index provides more hard evidence that life in a fragile, slowing economy is depressing.

High inflation and rapid interest rate rises and new wage increases probably not helping that at all either.

I was about to dig about for an upbeat note to close out on, but Diana just sent this:

“With an increasing supply shortfall, we have revised up our national average home price forecast for this year from a fall of -7% to around flat to up slightly ahead of 5% growth next year.

“The risk is high of a further leg down putting us back on track for a 15-20% top to bottom fall on the back of the impact of high and still rising interest rates and higher unemployment,” Diana says

But on the bright side…

“Cash and bank deposits are expected to provide returns of around 3.5%, reflecting the back up in interest rates.”


The Economic Week Ahead

The Americans have a few housing indicators (NAHB housing index, housing starts and home sales) which have started to turn up recently, according to D Mousina.

“There’s also some regional services PMIs, leading indicators (afraid they’re still indicating an American recession) as well as the June PMIs.”

Oh, hey. The Bank of England meet this week. I for one always find any BoE decision under intense, economic, politicial and social pressure quite solid entertainment.

Especially since another great British 0.25% interest rate hike is on the cards.

After last week’s just awful upwardly spiralling wages data was largely suppressed by the sights and sounds of Boris Johnson back in peak humiliation, we’ll likely be back here next week with the Poms grappling with an official cash rate of 4.75%.

The conservative government (wild air quotes) will also have to front UK consumer price data this week. While PM Sunak will have to answer a majority of questions about his predecessor, someone is bound to point out that annual inflation in Britain remains resilient at around (a terrifying) 8.5% year on year (to May).

China’s just not happening. Thankfully it has a relatively quiet week, but please – do keep the nostrils swept for any hint of stimmy –  it’ll smell like BHP and chicken.

On the other hand, Japan-watching is a rare pleasure at the moment. Tokyo has its May consumer price index (expected to be up by 3.2% over the year to May) as well as a few June PMIs. They could do well.

In Europe, I’ll be watching the June PMIs and Germany’s retail sales figures for May, but only so that you can watch the cricket.

If anything above utter tedium and irrelevance should occur, you’ll hear it right here on Stockhead third or fourth…

Australia’s June PMIs also drop. These will offer us an update on business activity, but since manufacturing isn’t really our bag, I’m not staying up for it. Anyway, my unstymied-by-an-economic- degree intuition won’t stop me from guesstimating business activity at home is being hampered by the fact that sometimes life in a fragile, slowing economy is depressing.

And finally. It happens 11 times a year and yet, how the pointless hours creep by in between the monthly (‘cept for January) release of the RBA’s (June) meeting minutes.

June should be a literary/fiscal feast for SOMP geeks.

This one promises to come complete with a hawkish tilt, a stiff explanation and the governor’s trademark literary style of ’emphatic directionless confidence’ all of should make for a thrilling read.

To mop up any confusion post-SOMP, the bank is rolling out Assistant Gov. Christopher Kent in Sydney and Deputy Gov. Michele Bullock does the AI Group too.

The Economic Calendar
Monday June 19 – Friday June 23

All sources from Commsec, Trading Economics, S&P Global Research


Australia RBA Meeting Minutes
RBA Deputy Governor Bullock speaks



PMIs (May)

Australia Judo Bank Flash PMI, Manufacturing & Services

Everyone else

US Market Holiday
Hong Kong Unemployment Rate (May)
Canada PPI (May)

China (Mainland) Loan Prime Rate (Jun)
Malaysia Trade (May)
Japan Industrial Production (Apr, final)
Japan Capacity Utilization (Apr)
Germany PPI (May)
Eurozone Current Account (Apr)
Taiwan Export Orders (May)
Hong Kong SAR Inflation (May)
United States Building Permits (May, prelim)
United States Housing Starts (May)

South Korea PPI (May)
Japan BOJ Meeting Minutes (Apr)
United Kingdom Inflation (May)
Canada Retail Sales (Apr)

China (Mainland), Hong Kong SAR, Taiwan Market Holiday
New Zealand Trade (May)
Philippines BSP Interest Rate Decision
Indonesia Loan Growth (May)
Indonesia BI Interest Rate Decision
Norway Norges Bank Interest Rate Decision
Switzerland SNB Interest Rate Decision
United Kingdom Bank of England Interest Rate Decision
Eurozone Consumer Confidence (Jun)
United States Current Account (Q1)
United States Initial Jobless Claims
United States Fed Powell Testimony
United States Existing Home Sales (May)

China (Mainland), Taiwan Market Holiday
Japan au Jibun Bank Flash Manufacturing PMI
Germany HBOB Flash PMI, Manufacturing & Services
France HCOB Flash PMI, Manufacturing & Services
Eurozone HCOB Flash PMI, Manufacturing & Services
UK S&P Global/CIPS Flash PMI, Manufacturing & Services
US S&P Global Flash PMI, Manufacturing & Services*
Japan Inflation (May)
Thailand Trade (May)
Malaysia Inflation (May)
Singapore Inflation (May)
United Kingdom Retail Sales (May)