What market and macroeconomic events took place over the past two weeks? In this update we look at the latest economic releases from the US, the latest in a long line of problems from Greece, and the impact these developments have had on the performance of the markets.
US economic figures have started to deteriorate
Economic numbers out of the US have started to deteriorate. Already-weak Q1 GDP figures were significantly revised down from 0.2% to a pretty dire -0.7%, as both inventory build-up and consumer confidence figures were both worse than initial estimates. Economic activity as measured by the Chicago PMI survey was also sharply down, falling to 46.2 and suggesting economic contraction. To make matters worse the US Bureau of Economic Analysis reported quarter-on-quarter profits from US corporates falling further than expected, down 8.7% since last quarter.
Eurozone economy continues to show signs of growth
The Eurozone economy continued to show signs of growth although consumer data were weaker. The economic sentiment index came in at 103.8, while flash PMI readings were all above 50 in expansionary territory. Manufacturing PMI increased to 52.3, and services figures slipped by 0.8 to 53.3. However, the consumer confidence flash reading fell further from -4.6 to -5.5.
Patience with Greece is running out
Elsewhere in Europe patience with Greece appears to be running out. Rhetoric from Greek officials that a deal is ‘imminent’ appears to diverge hugely from representatives of the country’s creditors – who have indicated little meaningful movement from their counterparts in Greece. Greece is due to make a €300 million payment to the IMF on Friday, and it is unclear whether the country will be able to meet the payment without bailout assistance.
Reports suggest a short delay to the payment could be permissible under a ‘bundling’ mechanism which would aggregate the payments to a larger lump later in the month. This would be the latest in a series of increasingly desperate one-shot tricks that Greece has used to avoid defaulting.
Last week’s other events
- Headline UK inflation fell into deflation, with prices down 0.1% year on year from a flat reading last month. Core inflation remained positive, but slipped from 1.0% to 0.8%. Retail sales were also resilient.
- German economic survey data pointed towards deterioration in the Eurozone’s largest economy. The ZEW Economic Sentiment Index fell from 53.3 to 41.9, whilst Current Conditions fell to 65.7 – both significantly worse than expected.
- Bucking the recent trend, Japanese GDP data were stronger than expected. The numbers showed annualised growth of 2.4% in the first quarter, ahead of expectations and faster than the 1.1% recorded in the final quarter of 2014. Unemployment also fell and industrial production was stronger than expected.
- Chinese house prices continued to fall and were down -6.1% year on year in April. The flash reading of the HSBC PMI measure of economic activity improved slightly in May, rising to 49.1 but remaining in contractionary territory.
Despite there being plenty of macroeconomic headlines, the markets were relatively unperturbed over the past two weeks. The exception is Japanese equities, which surged noticeably on the back of economic figures that exceeded expectations.
- Equities - On the back of strong data and continued QQE, Japanese equities continued to rally and rose steadily through the fortnight to finish up 4.1%. UK equities were relatively unmoved over the fortnight, only marginally stronger with the FTSE 100 a fraction below 7000 after volatile trading. The S&P was a lot more volatile in the last week but little changed for the fortnight overall, ending down 0.72%.
- Bonds – US and UK bond yields initially widened before tightening through most of last week. UK 10-year Gilt yields closed on Friday at 1.81%, whilst US Treasuries remained above 2% at 2.12%. German Bunds steadily tightened through the fortnight, with 10-years closing at 0.49% and 20-years back below 1% at 0.96%. 5-year Bunds were poised to once again turn negative, closing flat on Friday.
- Commodities – Oil continued to range trade – Brent traded in the mid US$60s and closed on Friday at US$65.21, whereas WTI closed at US$59.95. Copper was weaker and fell 6.4% to US$2.76, whereas gold fell back through the US$1,200 mark to close at US$1,192.
- Currencies – Last fortnight’s main currency mover was the US dollar, which regained some of its strength against other major currencies and closed at US$1.53 against the sterling. The Japanese yen continued its weakening trend, finishing at 124 yen against the US dollar.