TradeDay Macro Matters
Today we launch a new weekly recap blog, highlighting the major macroeconomic, fundamental and geopolitical developments that have impacted the wider financial markets over the past week, but with a particular focus on the US
Macroeconomic / Geopolitical developments
- Bond markets are still causing jitters
- Services PMIs continue to pick up, but where is the manufacturing recovery?
Bond markets continue to act as a warning
Volatility has receded since the banking crisis that shook markets back in March. The focus has since switched to the assessment of the Fed’s next move. Two conflicting issues continue to pull bond yields around. The need to tackle inflation is still key in the minds of Fed speakers. As the banking crisis has eased, this has subsequently pulled yields at the front end of the curve higher.
However, this is once more a bear flattener to the curve. This reflects the continued fear of recession. One final hike by the Fed may be on the cards, but markets remain concerned over the damage being done to the economy.
PMIs pick up but manufacturing is a drag
The global PMIs continue to show an improving trend. The flash data for April surprised to the upside and is encouraging. However, this is being driven by the services PMIs. This is coming as inflation pressures are beginning to recede. In Europe especially, we find manufacturing PMIs remain mired in contraction territory and are disappointing. Reducing cost pressures are coming from weakening new orders.
So, this is good news tinged with a heavy dose of concern still. For the US, there is a slightly better manufacturing picture (at least no longer in contraction), but there is little traction to a recovery. All in all, better news on inflation, but activity trends remain subdued and paint a picture of a growth struggle.
What’s next?
The Fed blackout may leave markets with an uncertain week into the end of the month. A first look at US Q1 growth will be the headline grabber, whilst the US Core PCE should continue the gradual trend of normalisation.
US
- Mounting signs of US recession
- Into the Fed “blackout period”
- US earnings are fair to middling
The signs of a US recession are growing
According to the Conference Board, the US Leading Economic Index fell sharply, by -1.2% in March. This leaves the index at is lowest since November 2020 in a move that is consistent with worsening economic conditions ahead.
“The Conference Board forecasts that economic weakness will intensify and spread more widely throughout the US economy over the coming months, leading to a recession starting in mid-2023.”
With US weekly jobless claims (also seen as a leading indicator for the US) remaining elevated, the prospect of recession is weighing on broad sentiment for major markets.
Into the FOMC blackout
As the Fed’s blackout period begins, markets are still caught between two narratives. The need to hike rates in the battle against inflation. And the worry that recessionary indicators are mounting in the States. As the worst of the banking crisis has eased (at least for the time being), Fed members have been focusing back on inflation once more this week.
Being a permanent voter on the FOMC, and aligning broadly as a centrist on the spectrum, John Williams is a good gauge for where the Fed is at. Williams believes that inflation is “still too high”. Loretta Mester, typically a more hawkish member of the FOMC favours rates above 5%, although she is not a voter in 2023. However, Patrick Harker is a voter this year and is one of the less hawkish members and he was also along similar lines.
US earnings look middle of the road
On the earnings front, the initial optimism from the banks is starting to wane. Last week we have seen some significant companies disappointing. With six cuts this year to its car prices, Tesla is focusing less on profit and more on sales growth. Investors have taken a dim view of this with a share move lower in the shares. After JP Morgan impressed recently, hopes of a banking resurgence have been quelled by Morgan Stanley’s significant 19% decline in earnings. With revenue also lower, merely beating lowball expectations on Wall Street leaves a thin shroud to cover the slowdown of the bank’s performance.
According to FactSet, with 18% of companies in the S&P 500 having reported, the outlook for the whole of Q1 earnings has been revised slightly higher (currently now on a run rate of -6.2%). This would still mark the second successive quarter of negative earnings. It is also continuing the negative trend on net profit margins, now at 11.2% would be the lowest since Q4 2020. At a sector level, stocks in the Energy and Consumer Discretionary sectors are managing to improve margins, whereas Materials and Information Technology seem to be struggling.
What’s next?
With the Fed into its blackout period, it is all just speculation on the next move by the Fed this week. The Advance GDP print for Q1 will get top billing on the economic calendar on Thursday. After the upside surprises of the US Retail Sales, there will be hopes that consumer spending can drag growth higher. The consensus is sitting around 2%, with the Atlanta Fed’s GDPNow looking stronger at 2.6% which would be a repeat of Q4.
It will be an interesting week for equities, with US futures sitting in tight ranges. For renewed direction, we are looking at key supports of 4096.5/94.25 on E-Mini S&P futures, and 12925.5/907.25 on E-Mini NASDAQ 100 futures. For upside breaks to hold, there would need to be decisive moves above resistance at 4208.5 and 13348.75 respectively.
There is a stacked corporate calendar this week. Highlights come from the tech giants, with Meta Platforms, Amazon and Alphabet all on the docket.
Europe
- UK wage growth and CPI firm up rate hike expectations
- Eurozone boosted by PMIs but manufacturing remains a drag
UK data points to more hikes from the Bank of England
It is becoming increasingly likely that the Bank of England will hike again in May. Headline inflation continues to run above 10%, whilst wage growth (average weekly earnings) is also continuing to come in higher than expected. The UK has stubbornly high inflation and this is will be giving the Bank of England plenty to consider for the meetings ahead.
However, there has been a stabilization seen in UK retail sales trends over recent months. Friday’s flash Composite PMI remains in mild expansion (due to the performance of the services sector), and there has been a surprise improvement in consumer confidence for April. This should leave the way clear for the Bank of England to concentrate on fighting inflation. That will mean a 25 basis points hike in May. There are question marks beyond there. With UK inflation proving very sticky, a May hike is unlikely to be the last.
Eurozone PMIs will encourage the ECB
The good news for the ECB is that the flash composite PMI continues to pick up in expansion territory, to 54.4 (from 53.7). Driven by the services sector, it seems as though the gradual easing of pricing pressures is helping activity. However, the continued lag and disappointment of the manufacturing activity which remains deep in contraction will mean that there is still much to ponder at the European Central Bank.
There is still plenty of work to be done on getting inflation down, whilst the weakness of new orders in manufacturing gives the doves something to argue. The flash HICP inflation next week will be key.
What’s next?
Monday’s German IFO will set an early tone for the week in the Eurozone. Furthermore, the Eurozone sentiment gauges are always worth keeping an eye on as they will give an early indication of activity in April. Friday’s German inflation will also help to set expectation for next week’s Eurozone HICP.
Asia
- A weaker Kiwi after a downside surprise in inflation
- A restructuring of the interest rate setting committee at the RBA
- Wages remain key to a shift in monetary policy in Japan
The Kiwi under selling pressure
The underperformance of the commodity currencies “down under” continues. However, there has been something of a shift. With Q1 New Zealand inflation coming in lower than expected, this has seen the expectation of rate hikes by the Reserve Bank of New Zealand being scaled back. There may only now be room for one more hike before the peak rate is seen (likely to be around 5.50%). This is weighing on the outlook for the NZD.
A shift at the Reserve Bank of Australia
There has been a key change in structure at the Reserve Bank of Australia. A new interest rate-setting committee for the Official Cash Rate will be far more diverse and independent. This will reduce the perceived power of the RBA Governor in making decisions. So far, markets seem to like the move, with a significant jump in the AUD. There has also been a notable rally in the AUD/NZD pair.
It is all about wages in Japan
The Bank of Japan decision will dominate this week in Asia. It will be the first meeting chaired by newbie Governor Kazuo Ueda. It is likely to be too soon for any fireworks this time round. Ueda has indicated that it is appropriate to continue with the ultra-easy monetary policy overseen by his predecessor, Haruhiko Kuroda. However, he has also cautioned against being behind the curve on policy decisions. That might suggest that the months to come will be more interesting that the meeting this week.
Commodities
- A sharp reversal lower in oil
- Precious metals losing upside momentum
A sharp retreat in oil
Oil is moving lower. There are increasing signs that the aggressive monetary policy by the Federal Reserve is beginning to weigh on the labour market. Added to the increasing signs of recession in the US and this is leaving traders to ask serious questions about oil demand. If the early weeks of April were dominated by the supply story (following the big cut in OPEC+ oil production) the narrative has switched decisively to the demand side now.
NYMEX WTI Crude Oil futures have pulled back sharply in the past week and momentum is now decisively negative. Technical analysts will be looking for the gap at $75.70 to be filled in the coming days. However, a decisive move below there would open the way to a deeper correction. The next support would be at $66.80 but if the downside momentum of the move continues, the March low at $64.12 may come into view.
Metals hit by the USD rally and declining sentiment
Yields and the USD have been choppy in the past week, but declining sentiment has weighed on metals prices. Now, this could be a bit of a delayed reaction to the recent rise in the USD and yields. However, with the rally topping out at $2048, Gold futures falling decisively back below $2000 is a deterioration in the outlook. We will be looking at a key higher low at $1950 (the April low) as a gauge now. Silver futures have also pulled back, from a peak of $29.95, although not as decisive yet. A move below $24.67 would be an indication of a correction.
On the calendar
Central Banks
Friday: With the Fed into its blackout period, the Bank of Japan monetary policy decision is the only significant central bank update this week.
Macro data
Date | Major Macro Data |
24/04/2023 | German IFO Survey |
25/04/2023 | US Consumer Confidence, US New Homes Sales |
26/04/2023 | Australian CPI, US Durable Goods |
27/04/2023 | EU Consumer Confidence, US Advance GDP and PCE |
28/04/2023 | Bank of Japan interest rate decision and statement, German Unemployment, GDP and HICP (inflation), US Core PCE, Canada GDP |
Corporate earnings
Date | US corporate earnings |
24/04/2023 | Coca-Cola, First Republic Bank |
25/04/2023 | 3M Co, General Electric, General Motors, McDonald’s, Verizon Communications, Alphabet, Microsoft, Visa |
26/04/2023 | Boeing, Meta Platforms |
27/04/2023 | Bristol-Myers Squibb, Caterpillar, Eli Lilly, Mastercard, Merck, Amazon, Intel Corp, Snap |
28/04/2023 | Chevron, Exxon |
Steve Miley
Co-Founder of TradeDay.
Steve is the former head of Technical Analaysis research at Merrill Lynch and Credit Suisse, and owner of the award winning research boutique Market Chartist.
