Mid-Week Update
The week that ended last Friday was characterized by mixed signs following the continued shock due to the tensions between Israel and Iran as well as the persistence upside pressure on bond yields.
The start of the week confirmed that investors' focus remains on developments in the Middle East and their possible consequences for energy prices.
Now that central banks find themselves in a "data-dependent" position, if we want to understand the conditions in which the world economy finds itself, it is essential to estimate the next moves of policymakers.
On Monday night, the Yen was in great shape after Ueda said that the BoJ was ready for a new rate tightening (-0.15% for the EUR/JPY, -0.1% for USD/JPY).
Monday saw an above-par start for all the main European stock exchanges, which are anxiously awaiting the macroeconomic updates regarding the PMI indices. EUR/USD reacted positively after strong beats in services PMI revealed weak spots in overall flash numbers. Manufacturing and services continue to diverge.
The Eurozone manufacturing PMI index fell from 46.1 to 45.6 points in April, against the 46.5 expected. However, the composite index rose beyond estimates, rising from 50.3 to 51.4 points, above the 50.8 expected, and the services index, rising from 51.5 to 52.9 points, against the 51.8 expected. April PMIs report the fastest expansion in almost a year.
However, inflationary pressures are increasing. Based on the April PMI survey, the bloc's activity posted its fastest growth in almost a year, suggesting an exit from the recent contraction. Despite this, these data are not completely positive, and in addition to still signalling important sectoral divergences, with the tertiary sector in good shape and the manufacturing sector continuing to decline, they also indicate a new increase in pressure on prices.
The UK manufacturing PMI index fell to 48.7 points in April from 50.3 in March. The composite PMI index instead rose to 54 points from 52.8 in the previous month, driven by the services PMI index which recorded growth to 54.9 points from 53.1 in March.
The April data indicate a sharp increase in the average cost of expenses in the private sector, with the inflation rate rising sharply compared to March and the highest level since May 2023. Higher purchasing price inflation is linked to higher wages for senior staff, particularly in the hospitality and leisure sectors. (remember that a reading above 50 indicates an expansion in economic activity; on the contrary, below 50 indicates a contraction).
Regarding the latest indications from the central banks, Villeroy (Bank of France) stated, "We must not wait too long; the effects of the increase in oil prices are uncertain".
Furthermore, the Council is divided on Schnabel's (member of the Executive Committee of the ECB) proposal to publish the dot plot on rates like the Fed.
The ECB's vice president, Luis de Guindos, defined the summer cut as a "fait accompli" but held back on subsequent interventions.
In the early afternoon Nagel declared that the ECB must be convinced that inflation is returning towards the 2% target before cutting rates (are we faced with an attempt to take a step backwards?).
As for the Federal Reserve, Chicago Fed President Goolsbee clearly stated that progress in reducing inflation has "run aground." Given the strength of the labour market and the improvements made to ease inflation over a longer time frame, Goolsbee thinks the current monetary policy is appropriate. The belief that rates will have to remain high for longer is now the dominant view at the Fed. Financial operators now await a first cut in September.
Now, the rate cut forecasts, even after Powell's latest public statement, are less optimistic and at this point, Goldman Sachs' call at the beginning of the year, which was confident in 6 cuts in 2024, looks rather off target.
Now, we are moving towards 2 cuts in 2024, but the two indicators under observation could also dismantle this hypothesis if GDP continues to be strong, as expected, and PCE is stable or rising; this hypothesis would make the decline appear increasingly distant inflation.
US Treasuries posted a good rally across the curve after Tuesday’s disappointing PMI report. More on this in the chart section below.
Is this the turning point? Services employment was just 47.3, down from 51.1 prior and now at the lowest level since March 2020. Manufacturing PMI fell back below 50.
For now, let’s look at what the models are telling us. Plenty of reversals are playing out which the models alerted us. What now?
Let’s dive straight in.