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Market views
- A sideways week for both fixed income and equity markets. On the negative side the inflation news remains worrying and central banks remain focussed on this. This was clear from the minutes of the ECB’s March meeting which said that more tightening needs to be done if inflation is to be brought back to target despite the risks to growth. On the positive side the first quarter results season is not throwing up any shocks. We are only about 20% through the US season, so much could change but so far earnings are coming in 5% better than forecasts which is slightly better than the long run average.
- The government debt ceiling in the US has come back on the agenda. The ceiling has been reached but it was thought that the government would have sufficient emergency resources to avoid bring it to a head before the second half of the year. However, taxation receipts are running lower than expected and it now looks like the government will run out of cash in June. The Republicans and Democrats are quite divided so there is likely to be some brinkmanship. We believe it will be resolved and the ceiling will be raised but we are likely to see some volatility until it gets sorted.
- There was a changing of the guard in the Bank of Japan with a new Governor (Mr. Ueda) appointed. The Bank of Japan is the only major central bank that has not gone on to a tightening mode and so far, he remains committed to the ‘Yield Curve Control’ policy keeping the 10-year yield in a set band. However, core inflation has just hit the highest level since 1981. The probability of a change in policy is high. Rising bond yields in Japan could have some spill-over effects to the rest of the world, as the Japanese are large buyers of fixed income assets. The scale of the impact is difficult to judge and might be minor, but one should expect some volatility should there be a change in policy.
Macro views
- Inflation data made grim reading again last week. The CPI report was released in the UK and there was a large and broad-based upside surprise. Headline inflation did decline from 10.4% to 10.1% year-on-year, but core inflation held static at 6.2%. Both Service and Goods inflation was higher than expected. There was hope that the Bank of England would implement one more hike and hold but that looks unlikely now. There should be at least two hikes from here. Inflation data will be released in the euro area next week, hopefully it will make for better reading.
- China’s Q1 GDP was stronger than expected rising 11.9% quarter-on-quarter. The services side of the economy was the main engine during the quarter as the economy re-opens. Travel and leisure activity showed major increases. The increased consumption did reduce the savings rate but at 32% there is still scope for it to fall further. Growth forecasts for 2023 are being increased, and the economy is now expected to grow over 6% this year. There is uncertainty about how sustainable that growth rate will be going into 2024.
- The major business sentiment surveys (PMI) were released for the euro area and the composite measure hit an eleven-month high of 54.4, well in expansion territory. All the strength is coming from the services sector with the Services PMI jumping to 56.6. The manufacturing sector on the other hand declined again. The Manufacturing PMI dropped to 45.5, recession territory. A positive from it was that one third of the drop was due to shortening delivery times. There appears little impact from the bank stresses in March.
Chart of the week: Still humming 
It is more than a month since the bank failures in the US and the global economy continues to perform well. As you can see from the Economic Surprise Indices above all regions are continues to perform better than forecast over the last month. We believed that the banking event were company specific and there would be little broader impact and so far, that is case. For financial markets there is a negative side to this. With economies remaining robust and inflation not decelerating quickly enough, central banks will be in tightening mode for some time yet.
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