Macro Matters - Weekly review, w/c April 24

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, 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 Fed’s next move. Two conflicting issues continue to pull bond yields around. Tackling inflation remains key for Fed speakers, and as the banking crisis has eased, this has pulled yields at the front end of the curve higher. However, this is once more a bear flattener to the curve, reflecting fears of recession. One final hike by the Fed may be on the cards, but markets remain concerned about the damage being done to the economy.

PMIs Pick Up, but Manufacturing Is a Drag

The global PMIs show an improving trend, with April flash data surprising to the upside. However, this growth is being driven by services PMIs as inflation pressures begin to recede. In Europe especially, manufacturing PMIs remain in contraction, with weakening new orders reducing cost pressures. For the US, the manufacturing picture is slightly better, moving out of contraction but still lacking momentum for a full recovery. While inflation news is encouraging, subdued activity trends paint a challenging picture for growth.

What’s Next?

The Fed blackout may leave markets uncertain into the end of the month. US Q1 growth data will headline the week, and US Core PCE data should continue its gradual normalization trend.

US

• Mounting signs of US recession

• Entering the Fed “blackout period”

• US earnings are fair to middling

The Signs of a US Recession Are Growing

The Conference Board’s US Leading Economic Index fell by -1.2% in March, hitting its lowest point since November 2020. This decline signals worsening economic conditions. Elevated weekly jobless claims add to recession concerns, weighing on sentiment for major markets.

Into the FOMC Blackout

As the Fed’s blackout period begins, markets are torn between two narratives: the need to hike rates to battle inflation and the growing signs of recession in the US. Fed members remain focused on inflation, with differing perspectives:

• John Williams sees inflation as “still too high.”

• Patrick Harker supports a less hawkish stance.

• Loretta Mester advocates for rates above 5%, though she is not a voter in 2023.

US Earnings Look Middle of the Road

Optimism from early bank earnings has waned. Tesla’s focus on sales growth over profit has weighed on its shares, while Morgan Stanley reported a 19% decline in earnings. According to FactSet, 18% of S&P 500 companies have reported, with Q1 earnings on track for a -6.2% decline, marking the second consecutive quarter of negative growth. Net profit margins, now at 11.2%, are the lowest since Q4 2020.

What’s Next?

With the Fed in blackout, speculation will dominate. The Advance GDP print for Q1 will headline Thursday, with hopes that consumer spending can support growth. Consensus sits around 2%, while the Atlanta Fed GDPNow estimates 2.6%.

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

Stubbornly high inflation and stronger-than-expected wage growth are pushing the Bank of England towards a likely 25-basis-point hike in May. While retail sales and consumer confidence show signs of stabilization, inflation remains the top priority.

Eurozone PMIs Encourage the ECB

The flash composite PMI rose to 54.4, driven by services. However, manufacturing remains deep in contraction. Weak new orders and slow progress on inflation leave the ECB with plenty to consider.

What’s Next?

German IFO data will set the tone early in the week, with Eurozone sentiment gauges and German inflation data providing further clarity.

Asia

• A weaker Kiwi after a downside inflation surprise

• Changes to the RBA’s interest rate committee

• Wages remain key to Japanese monetary policy

The Kiwi Under Pressure

A downside surprise in New Zealand’s Q1 inflation has reduced expectations for rate hikes by the RBNZ. The peak rate is now projected at 5.50%, weighing on NZD performance.

Changes at the Reserve Bank of Australia

The RBA has restructured its interest rate-setting committee, reducing the Governor’s influence. This has been well-received by markets, boosting AUD performance.

Wages and Japan’s Monetary Policy

The Bank of Japan’s new Governor, Kazuo Ueda, is expected to maintain ultra-easy monetary policy, though future changes may arise as wage dynamics evolve.

Commodities

• A sharp reversal lower in oil

• Precious metals losing upside momentum

Oil Pulls Back Sharply

Concerns over US recession and oil demand have shifted the narrative from supply constraints to weak demand. NYMEX WTI Crude futures have seen sharp declines, with key support levels at $75.70 and $66.80 in focus.

Metals Weaken on USD Strength

Gold has fallen below $2000, and Silver is also under pressure, signaling a correction. Key levels for Gold lie at $1950, while Silver’s higher low sits at $24.67.

On the Calendar

Central Banks

Friday: The Bank of Japan monetary policy decision will dominate central bank updates.

Macro Data

• 24/04/2023: German IFO Survey

• 25/04/2023: US Consumer Confidence, US New Home 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 decision, German Unemployment, US Core PCE

Corporate Earnings

• 24/04/2023: Coca-Cola, First Republic Bank

• 25/04/2023: Alphabet, Microsoft, Visa

• 26/04/2023: Boeing, Meta Platforms

• 27/04/2023: Amazon, Intel Corp, Snap

• 28/04/2023: Chevron, Exxon

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