Day: 5 June 2023

Jean Bovin – Head of BlackRock Investment Institute, together with Wei Li – Global Chief Investment Strategist, Alex Brazier – Deputy Head, and Nicholas Fawcett – Macro Research all forming part of the BlackRock Investment Institute, share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.

Key Points

Market focus to shift: We see the market’s focus returning to higher-for-longer rates and sticky inflation after a U.S. debt ceiling deal. We prefer an up-in-quality portfolio.

Market backdrop: U.S. stocks hit 2023 highs after the debt ceiling deal. Yields rose amid the specter of rate hikes after Friday’s payroll report showed a jump in new jobs.

Week ahead: China macro data is in focus this week. We trim our growth view slightly as the economic restart loses steam and policy reactions remain uncertain.

Last week’s U.S. debt ceiling deal removes near-term uncertainty and thrusts the market’s focus back to the macro picture: sticky inflation due to tight labor markets. We see rates staying higher for longer as a result. We keep a quality tilt in portfolios and prefer income for now. Over time, we could see the attention shifting to the large U.S. debt load – and investors demanding more compensation for holding long-term government bonds.

The U.S. debt ceiling deal has taken the near-term risk of default off the table. Yet the fiscal situation remains challenging, in our view. Total public debt as a share of GDP has jumped to around double the level in 2005 (left chart). The budget deficit is also already large (right chart) at a time when the economy is overheating. The debt deal doesn’t really change this picture, we think. The spending cuts are a fraction of what was cut in the last debt ceiling showdown in 2011: about 0.3% of GDP, according to the Congressional Budget Office, compared with 1% in 2011. We don’t see spending cuts dragging on growth in the same way as a result. But we do think higher-for-longer interest rates will raise debt servicing costs and could leave debt levels growing in this new macro regime. We have said the market focus would move back to the macro picture after the debt ceiling deal – now the Federal Reserve and stubborn inflation are retaking the spotlight.

The pandemic shocked U.S. labor supply, creating worker shortages. The labor market remains extremely tight, as confirmed in the latest payrolls data, with workforce participation not having improved. That is keeping core inflation sticky. This has presented the Fed with a sharp trade-off: crush growth with even higher rates or live with some inflation. We think the Fed will have to keep policy tighter. Markets have already started to mull the possibility of another rate hike even after the Fed signaled a potential pause. Markets are no longer pricing in repeated Fed rate cuts, waking up to our long-held view that rates are likely to stay higher for longer to combat persistent inflation.

High debt in the new regime

Attention could also eventually shift to the broader U.S. fiscal position with rates staying higher, in our view. The relatively smaller spending cuts in the U.S. debt ceiling deal aren’t likely to put a dent in the debt load, in our view. They stand in stark contrast with the aftermath of the 2008 financial crisis when the focus swiftly shifted to fiscal austerity. Interest rates were near zero then and debt servicing costs were at record lows. But now rates have jumped in the fastest rate hiking cycle since the 1980s.

Higher rates mean higher debt servicing costs. We think persistent inflation and high debt levels could cause investors to demand more compensation for holding U.S. assets over time, especially long-term Treasuries.

We also expect a burst of Treasury-bill issuance as the government seeks to replenish the money drawn down since the debt ceiling was hit earlier in the year. We estimate bill issuance could balloon to as much as $1 trillion in the next few months – well above normal issuance levels outside of past crises like the 2008 financial crisis and the pandemic. That could add to volatility in fixed income, in our view, especially in the very short-dated maturities. We tweak our preference for short-term Treasuries as a result, extending the preferred maturities beyond short-term paper to encompass two-year Treasury notes that have repriced in recent weeks.

Bottom line

The U.S. debt ceiling deal removes near-term uncertainty – we now expect markets to focus on the macro picture. We see higher-for-longer rates, so we keep our quality tilt in equities and bonds and prefer income for now. We like short-term Treasuries, emerging-market local currency debt and inflation-linked bonds.

Market backdrop

U.S. stocks climbed to 2023 highs after the debt ceiling deal. Yields rose as markets eyed more rate hikes after Friday’s payroll report showed a jump in new jobs. The number of jobs added in May was well above market expectations. But the unemployment rate rose with no improvement in labor force participation. We don’t think the labor shortage is easing, so wage growth remains elevated. We think that will keep core inflation sticky – and makes rate cuts this year unlikely.

China macro data is in focus this week as the restart loses steam. We now expect GDP growth to be a bit below 6% this year rather than slightly above as momentum slows and policy reactions remain uncertain. Deflationary pressures and weaker growth increase the odds of potential policy easing, but we think targeted support for sectors like real estate is more likely.

Week Ahead

June 5: China services PMI; U.S. ISM services PMI

June 7: China trade data

June 9: China CPI and PPI

June 9-16: China total social financing

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BlackRock’s Key risks & Disclaimers:

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of 5^th June, 2023 and may change. The information and opinions are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

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This information has been accurately reproduced, as received from  BlackRock Investment Management (UK) Limited. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Information Document (KID), which may be obtained from MeDirect Bank (Malta) plc.

Franklin Templeton’s Notes from the Trading Desk offers a weekly overview of what our professional traders and analysts are watching in the markets. As part of Templeton Global Equity Group, the European equity desk is manned by a team of professionals based in Edinburgh, Scotland, whose job it is to monitor the markets around the world. Their views are theirs alone and are not intended to be construed as investment advice.

The Digest

Global equities were mixed last week, selling off into the end of May before bouncing at the start of June. The MSCI World Index finished the week up 1.6%, while the S&P closed the week up 1.8%, the STOXX Europe 600 Index closed up 0.2%, whilst the MSCI Asia Pacific Index was up 1.7%. There wasn’t really one overarching theme that drove market moves last week. The US debt ceiling continued to make headlines, which buoyed risk assets as the deal passed in Congress.

Equity markets kicked on again following Friday’s May employment report, as the market appeared to look beyond the better-than-expected non-farm payroll figure and focused on the rise in the unemployment rate to 3.7%. In terms of fund flows, last week equities saw the largest weekly inflow since February, totalling US$14.8 billion. Technology stocks saw the largest weekly inflow on record.

Data around market breadth has been interesting of late. In the United States, May notched the worst breadth behind a market gain ever—just 28% of S&P 500 members were up on the month, with only five stocks accounting for 96% of the S&P’s gains this year. Market breadth is deteriorating quickly in Europe, too.

Week in review

Europe

Last week was mixed week for European equities, closing out May lower before bouncing into the end of the week. As noted, the STOXX Europe 600 Index finished down 3.2% in May, its worst month of the year so far. Whilst Hong Kong’s Hang Seng Index hit bear market territory (dropping 20% from January highs) and the technology-heavy Nasdaq Index continues to rip higher, European equities appear to be somewhere in the middle.

Cyclicals in Europe outperformed defensives last week, with basic resources stocks closing higher on speculation that China is weighing a property market support package to boost its economy. Real estate finished higher on the week amidst some significant short covering on Friday. Defensives lagged, with health care, personal and household goods, and food and beverage all lower. Telecomms were the week’s laggard.

Inflation appears to be continuing to cool in the eurozone. The Eurozone Consumer Price Index (CPI) report fell sharply to 6.1% in May, with the Core CPI down moderately to 5.3% from 5.6% in April. Peak interest rates were repriced lower on the back of the report. Whilst some European Central Bank (ECB) officials welcomed the retreat, they did continue to push the hawkish messaging last week. Comments suggest officials are still committed to a June hike, and there remains a strong possibility of a hike in July too, as they continue to fight inflation. The market had fully priced in two 25 basis point hikes for June and July, but we saw that probability pare back after the inflation prints last week.

As mentioned, May was the worst month of the year for European equity markets so far and the worst month relative to US equities since the 2020 COVID-19 crash. It is usually a weak month, and the trading range had been tight all the way through April. Sector performance divergence was large in May between the best-performing sector (technology) and worst-performing (real estate).

United States

US equities finished broadly higher last week. Risk sentiment improved during the week as US lawmakers passed the bill designed to suspend the government’s debt ceiling through until 2025. The debt-ceiling debate had been a hot topic for markets in preceding weeks, but passed without too much fuss. We now expect a round of Treasury-bill issuance to hit the market, which should impact broader liquidity. The S&P 500 Index closed last week up 1.8%, finishing firmly above 4200, which has been a clear technical resistance level so far this year. A risk of a significant short squeeze remains.

All US sectors finished higher last week, with cyclicals outperforming defensives. Consumer discretionary stocks outperformed amidst data pointing to a resilient US labour market. The defensives lagged, although utilities and consumer staples still finished slightly higher. Meanwhile, the Nasdaq 100 Index hit a new relative high versus the Russell 2000 Index last week.

Debate rages on as to whether the Federal Reserve (Fed) will pause its tightening cycle in June, with markets now pricing in just a 25% chance of a rate hike this month. Board members Jefferson and Harker both signalled support for skipping a month, complementing previous comments from Fed Chair Jerome Powell who said the Fed faces uncertainty on the lagged effects of tightening so far.

Last week’s data releases added fuel to the debate. In terms of misses, the Dallas May Manufacturing Purchasing Managers’ Report (PMI) fell for the fourth consecutive month, its worst run since May 2020. Chicago’s equivalent was a large miss as well, coming in at 40.4.

However, there were a number of high-profile reports last week that were more upbeat. US job openings came in at 10.1 million, with the prior number being revised higher, too. The May employment report came out on Friday, and nonfarm payrolls came in at 339,000, higher than expected. The prior report was also revised up.

With the US labour market displaying continued strength, it’s fair to say that the data is not consistent with an imminent recession, which lifted equity markets. However, the US labour market doesn’t appear to be slowing enough to ease inflation, which will give the Fed plenty of food for thought heading into its policy meeting next week.

Asia Pacific

Last week was a good one for Asia overall as the MSCI Asia Pacific Index finished the week up 1.67%, with Japan’s market leading the way, up 1.97%.

Chinese equities rose after the US Senate passed legislation to suspend the debt ceiling, reviving investors’ risk appetite, with the lower likelihood of a Fed rate hike in June also helping sentiment.

Elsewhere, all eyes were on China’s economic releases last week, starting with the official PMI and Caixin PMI numbers, which showed a big divergence. The official PMI dropped more than expected to 48.8, the lowest reading since December 2022, whereas the Caixin PMI was higher than expected, rising to 50.9. Despite this discrepancy, the market is indicating a downward economic trend and an urge for policy stimulus/easing.

Also, industrial profits fell 20.6% in the first four months of the year versus the prior year, only marginally better than the 21.4% decline recorded in the first quarter, amidst waning domestic and external demand. And finally, new home sales rose 6.7% in May versus the prior year, down from gains of more than 29% in the previous two months—further evidence of a waning recovery, despite several stimulus measures from the government at the end of 2022.

Sector-wise, media, software and telecomms were the big winners of the AI/computing frenzy, as domestic investors rushed back into these sectors, with value/cyclical sectors underperforming on the back of a gloomy outlook for earning/growth.

The Hang Seng Index closed the week up 1.1% thanks to a late rally on Friday, with generally cautious trading following mixed economic data from China. The US debt-ceiling deal was closely watched as well.

Chinese tech shares led the rally, although Friday’s rally in US-listed Chinese American depositary receipts left them close to parity with their Hong-Kong counterparts.

There were media reports that the Chinese government was working on a series of new measures to support the property market, refining and extending the 16-point rescue package introduced in 2022.

Looking at the sectors, AI stocks rallied after Baidu said it was going to set up a CNY1 billion investment fund to promote AI development, semiconductor stocks extended the rally on the AI frenzy sparked by Nvidia’s bullish outlook for AI applications, and the education sector rose after President Xi Jinping called on top officials to boost a “high quality” education system that would strengthen China’s development.

Last week was decent for Japanese equities after a late rally on Friday drove the Nikkei up 1.97% on strong domestic earnings and yen weakness.

Bank of Japan (BoJ) Governor Ueda said it was premature for the bank to discuss details of an exit from its ultra-easy monetary policy and that there was no set time frame for achieving its 2% inflation target, given uncertainty about the outlook for prices. He continued to emphasise the need for central banks to be more careful about how they communicate. Market speculation has continued about the possibility of a snap election in Japan, which is seen as delaying the BoJ’s exit from easy monetary policy.

Despite its recent weakness versus the US dollar, the yen had a somewhat better week. Officials have now stated that they will closely watch currency moves and respond appropriately as needed, not ruling out any option available if necessary.

There was good news for the tourism sector last week, as data showed the more than 10 million foreigners reported overnight stays in the country’s hotels and other accommodation facilities in April for the first time since the pandemic outbreak. The weaker yen, an increase in international air traffic, and the start of Japan’s cherry blossom season all played a part in the increase.

Sector-wise, pulp paper, automotive and real estate stocks led the way higher, while shippers and airlines underperformed.

The week ahead

Holidays        

Monday 5 June: Greece; Denmark
Tuesday 6 June:  Sweden

OPEC+ (which includes Russia) met over the weekend. Saudi Arabia announced an output cut of one million barrels per day  in order to prop up oil prices. The rest of the 23-nation group offered no additional action but did pledge to maintain their existing cuts until the end of 2024. Oil prices have continued to bounce this morning.

Key Events

Sunday 4 June

OPEC+ meeting, including Russia

Monday 5 June 

China: Caixin Services PMI
United Kingdom: New Car Registrations, Official Reserves Changes, S&P Global/CIPS UK Services/Composite PMI
EU: S&P Global Eurozone Composite/Services PMI, Sentix Investor Confidence, Producer Pruce Index (PPI)
France: S&P Global France Services/Composite PMI, Private Sector Payrolls
Germany: Trade Balance, Exports/Imports SA, S&P Global Germany Services/Composite PMI
Italy: S&P Global Italy Composite/Services PMI
United States: S&P Global US Services/Composite PMI, ISM Services Index/Prices Paid/Employment/New Orders, Factory Orders/Ex Trans, Durable Goods Orders/Ex Transportation, Cap Goods Orders Nondef Ex Air

Tuesday 6 June                    

United Kingdom: BRC Sales Like-For-Like, S&P Global/CIPS UK Construction PMI
EU: Retail Sales
Germany: Factory Orders/WDA, S&P Global Germany Construction PMI

Wednesday 7 June

France: Trade Balance, Current Account Balance, Total Payrolls
Germany: Industrial Production SA/WDA
Italy: Retail Sales
United States: MBA Mortgage Applications, Trade Balance

Thursday 8 June    

United Kingdom: RICS House Price Balance
EU: GDP SA, Govt Expend/Gross Fix Cap, Household Cons, Employment
Italy: Bank of Italy Reports on Balance-Sheet Aggregates
United States: Consumer Credit, Initial Jobless/Continuing Claims, Wholesale Inventories/Trade Sales, Household Change in Net Worth

Friday 9 June

China: Aggregate Financing & Money Supply
Italy: Industrial Production/WDA/NSA

 

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This article reflects the analysis and opinions of Franklin Templeton’s European Trading Desk as of 22nd May 2023, and may vary from the analysis and opinions of other investment teams, platforms, portfolio managers or strategies at Franklin Templeton. Because market and economic conditions are often subject to rapid change, the analysis and opinions provided may change without notice. An assessment of a particular country, market, region, security, investment or strategy is not intended as an investment recommendation, nor does it constitute investment advice. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy. This article does not provide a complete analysis of every material fact regarding any country, region, market, industry or security. Nothing in this document may be relied upon as investment advice or an investment recommendation. The companies named herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. Data from third-party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered by FT affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction.

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MeDirect Disclaimers:

This information has been accurately reproduced, as received from Franklin Templeton Investment Management Limited (FTIML). No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Information Document (KID), which may be obtained from MeDirect Bank (Malta) plc.