Equity markets continued to rally – weekly update 18 February

Equity markets continued to rally, while core sovereign bonds were little moved. UK GDP missed expectations but the retail sales report at the end of the week provided a boost and there were few signs of inflationary pressures building.

UK data were pretty sour

UK economic data at the start of the week were pretty sour, with misses on GDP and industrial activity. GDP in the fourth quarter slowed from 0.6% to 0.2% quarter on quarter (qoq), compared to the 0.3% expected (the year on year – yoy – reading fell from 1.5% to 1.3%, 1.4% was forecast). Within that, private consumption fared marginally better than expected (0.4% qoq, down from 0.5% but ahead of the 0.3% expected). However, echoing concerns relating to business investment that we discussed last week, total business investment fell further than expected, contracting -1.4% in the further quarter from a -1.1% reading and defying forecasts for a slightly improvement to -1.0%. This puts business investment -3.7% lower than the same period the year before. Reinforcing this point, industrial production for December was worse than expected. Activity contracted -0.9% yoy, better than the -1.3% in November, but markets were hoping for more of an improvement to -0.5%, with manufacturing activity the main detractor, coming in a full percentage point worse than forecasts, at -2.1% yoy fall (from -1.2%, -1.1% was expected).

Reasons for positivity

There were reasons for positivity though, as Retail Sales recovered strongly. January retail sales growth came in at a healthy 4.2% yoy, comfortably ahead of the 3.4% expected, and an acceleration of the 3.1% seen for December. Clothing and footwear were particularly strong, up 5.5% yoy as shoppers took advantage of January sales (though they still spent 4.5% more by value). The last few months have been volatile for retail sales, with beats in November and misses in December, but the three-month average of 3.7% growth yoy is a much healthier level than we saw in the period previously. Clearly solid wage growth and more subdued inflation are buoying consumer sentiment, but this remains fickle, particularly against the backdrop of political uncertainty.

Germany appears to have narrowly avoided slipping into technical recession

Germany appears to have narrowly avoided slipping into technical recession, with a flat first estimate of fourth quarter GDP compared to a forecast for 0.1% qoq. Having contracted -0.2% in the third quarter a negative reading would have meant the Eurozone’s economic powerhouse has been in recession, though the miss is not exactly something to cheer about. For the wider Eurozone, fourth quarter GDP was unchanged at 0.2% qoq, in line with expectations (the yoy reading was also unchanged as expected, at 1.2%). Japan’s GDP rebounded from -2.6% in the third quarter to 1.4% annualised in the fourth quarter, in line with forecasts.

No real signs of fresh inflation pressures

There were no real signs of fresh inflationary pressures, with UK CPI cooling slightly further than expected, down from 2.0% to 1.8% yoy, 1.9% was expected). The core was unchanged at 1.9% (also as expected). US CPI cooled from 1.9% to 1.6% yoy, though slightly above the 1.5% expected, while core CPI held at 2.2% (2.1% was expected). CPI in China dipped from 1.9% to 1.7% (no change was expected). The lack of any big misses will be good news for Central banks which have generally sought a pause in monetary policy after recent tightening (except for China where the People’s Bank of China is looking to deploy targeted stimulus).

Last week’s other events

• US December retail sales were disappointing, with the control group contracting -1.7% month on month (mom), down from 1.0% in November, and well below forecasts for 0.4% growth. Business inventories in November contracted -0.1%, from 0.9% growth in November and worse than the 0.2% growth forecast. The NFIB Small Business Optimism Index fell from 104.4 to 101.2 (103.0 was expected). January Industrial Production contracted -0.6% mom, from 0.1% (no change expected)
• Japan’s Machine Tool Orders slipped from -18.3% to -18.8% yoy. Capacity Utilisation fell from 1.0% to -1.9% mom in December
• Eurozone Industrial Production continued to contract, shrinking -4.2% yoy in December, down from -3.0% and worse than the -3.3% expected

The markets

Equities continued to rally, last week, with the commodity complex also bid up – however sovereign bonds were little moved overall.

Equities

Another good week for equity markets, led by Europe (excluding the UK) which returned 3.3% for the week, followed by the US, which was up 2.6% and the UK gained 2.4%. Equities in Japan were also up, returning 2.4%, but Emerging Markets failed to participate and were fractionally down, falling -0.1% (all MSCI indices, total return basis in local currency).

Bonds

Core sovereign bonds were ever so slightly softer on the week, but the magnitude was very limited. 10-year UK gilt yields were just 1 basis point (bp) higher to close at 1.16% on Friday, and the same was true of the equivalent German bund yields, with the 10-year 1 bp higher to 0.10%. 10-year US Treasury yields rose 3 bps to 2.66% while 10-year Japanese government bonds are still negatively yielding, at -0.02% (though 1 bp higher from -0.03% last week).

Commodities

Oil strengthened, with Brent Crude reaching US$66.25 per barrel and the highest reading since November, while gold was also stronger, rising to US$1,322 per ounce – its strongest level since April 2018. However copper was slightly softer, dipping to US$2.80 per lb.

Currencies

The Japanese yen was relatively weak, particularly against a strengthening US dollar, though the moves were generally quite limited. Sterling closed on Friday at US$1.29, €1.14 and ¥142.

The week ahead

It’s a less busy week, but there are still a few releases worth highlighting. UK wage data on Tuesday will be interesting given the recent strength and Retail Sales figures, with the market expecting further improvement from 3.4% to 3.5% yoy in Average Weekly Earnings. On Thursday we have PMI readings from the Eurozone and the US (Markit readings), as well as US Durable Goods Orders for December (1.8% mom from 0.7% expected). The daily breakdown is as follows:

Monday: It’s a very quiet start to the week with the President’s Day holiday in the US. Only the UK House Prices index from Rightmove is of any potential interest.

Tuesday: The UK jobs data are out in the morning (headlines covered above), and we will also have Eurozone Construction Output and the ZEW business surveys for the Eurozone out.

Wednesday: The Eurozone Consumer Confidence reading is out in the afternoon, and in the evening the latest Federal Open Market Committee minutes are released, which will be analysed for any further insight into the Federal Reserve’s latest thinking.

Thursday: The data releases for the week are concentrated on Thursday. Early in the morning, Japan reports Manufacturing PMI and the All Industry Activity Index. Later in the morning, the Eurozone PMIs from Markit are released, with markets expecting Manufacturing PMI to have dipped from 50.5 to 50.3, but Services PMI is expected to have increased from 51.2 to 51.4. In the afternoon, US Durable Goods orders are out (details about), as well as the Markit PMI readings (Manufacturing PMI is forecast unchanged at 54.9). Later in the evening, Japan reports the latest CPI numbers (0.2% from 0.3% yoy expected).

Friday: It’s a quiet end to the week, with the IFO surveys of business expectations in Germany the only release of note.