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Stocks made a comeback last week thanks to impressive earnings from some Big Tech names, with the S&P 500 and Nasdaq posting their best weeks since November. European equities also snapped a three-week losing streak on better-than-expected earnings results. An additional boost to sentiment came from easing tensions in the Middle East, which paved the way for gold to register its biggest daily decline in 2 years last Monday. Signs that the Fed will keep rates higher for longer are also dimming the precious metal’s shine.
The markets originally expected a 25-basis point Fed cut in June, however, for the first time, the first quarter-point Fed rate cut was not fully priced in until the December 2024 FOMC meeting. Markets now also see a 1 in 5 chance that the Fed will actually increase rates, rather than cut them. With rate cut expectations receding further, the US 10-year Treasury yield hit its highest level YTD. The market action was echoed in Europe, and the 10-year Bund yield also hit a new 2024 high.
This week promises an oasis of data, including the US ISM PMI, a wealth of US labour market data, Eurozone inflation and GDP growth. The Fed’s May Day meeting on Wednesday will be the focal point. The US central bank is expected to leave rates unchanged, with the benchmark overnight interest rate remaining in the 5.25%-5.50%, where it has been since July.
Key highlights from the past week:
Eurozone private sector activity warms up
Though temperatures across Europe have become chilly again, private sector activity warmed up further in April. The composite PMI index reached 51.4, according to flash estimates, up from 50.3 the previous month and above market expectations of 50.8. This is the second consecutive month of expansion and the fastest since May 2023.
The bright spots in the data are concentrated in the services sector, for which the PMI rose to an eleven-month high of 52.9, from 51.5. New orders rose at the fastest pace since May last year, while the rate of employment growth reached a ten-month high. The latter, and the fact that service providers raised prices at an accelerated pace, does, however, present an attention point for the ECB as it decides whether a June rate cut is to be or not to be. In our opinion, this data isn’t enough to deter the ECB, but alongside other factors, it could influence the pace of cuts beyond June if such trends persist.
Contrasting with the steadfast services sector, the manufacturing downturn entered its thirteenth month. The PMI fell from 46.10 to 45.60 (as a reminder, a reading below 50 is associated with contraction). The outlook remains challenging, and this is reflected in the fact that input purchases fell and the lack of a turnaround in the inventory cycle. There were, however, some glints of hope: job losses eased slightly and input prices in manufacturing continued to fall, helped by improved supply conditions. Disruptions in the Red Sea are not having a tangible impact for now.
Looking at intra-Eurozone figures, especially solid growth was again reported when excluding the traditional powerhouses, France and Germany.
With that said, Germany notably edged back into growth territory for the first time in ten months as resurgent growth in the service sector (53.3 from 50.1) was accompanied by a cooling of the manufacturing downturn (42.2 from 41.9). This mild improvement doesn’t change the fact that demand is weak, illustrated by the fact that the forward-looking new orders sub-index fell at the fastest pace in 5 months, and factory gate prices fell the most since September 2009. Overall, the German Composite PMI which encapsulates both manufacturing and services managed to rise to 50.5 from 47.7.
At the same time, the French economy came close to stabilising. Its services sector grew for the first time in almost a year (50.5 from 48.3), offsetting continued weakness in the manufacturing sector (44.9 from 46.2) which has been in decline for fifteen months. The data lacked encouraging signals: New orders fell at the sharpest pace since January following a deterioration in demand from overseas customers. On the price front, input cost inflation rose to its highest level since February 2023, driven by higher prices for metals and oil-based products.
German business climate brightens somewhat
In line with the improvement in the PMI, the German IFO business climate indicator rose to its highest level since May 2023, driven by growing expectations of possible interest rate cuts by the European Central Bank and a gradual easing of inflationary pressures. Sentiment improved among manufacturers (-8.5 vs. -9.9), service providers (+3.2 vs. +0.4), traders (-22.0 vs. -22.9) and construction firms (-28.5 vs. -33.2).
A more confident Eurozone
Zooming out again to focus on the Eurozone as a whole, consumer confidence rose slightly to -14.7 in April, the highest level of sentiment since February 2022, just before Russia invaded Ukraine. Optimism is largely driven by hopes around upcoming ECB rate cuts and moderating inflation (The first estimates of inflation in the eurozone, published on Tuesday, will give an initial indication of the ECB's future decisions).
Regarding the latter, the ECB's March Consumer Expectations Survey showed that median consumer perceptions of inflation over the past 12 months (5% from 5.5%) and inflation expectations for the next 12 months (3% from 3.1%) fell to their lowest levels since December 2021.
US data disappoints
US PMIs implied that the US economy might no longer be at the top of its game. The composite PMI fell to 50.9 in April (vs. 52 expected), the lowest level in 4 months.
On a sectoral comparison, the services PMI fell to 50.9 (vs. 52 expected), the lowest level in five months. Demand was constrained by a fall in new business due to high interest rates and prices. Employment also fell sharply, by the largest amount since mid-2020. The manufacturing sector reached its lowest level in four months, dipping into contraction territory at 49.9. That’s down from 51.9 in March and below market expectations of 52.
The upside is that the deterioration of demand and cooling of the labor market fed through to lower price pressures, as April saw a welcome easing in rates of increase for selling prices for both goods and services.
Then on Thursday, the Q1 GDP print had the undesirable combination of a downside surprise on growth, and an upside surprise on inflation, kindling stagflation fears.
The US economy expanded at an annualised rate of 1.6% in the first quarter, down from 3.4% in the previous quarter and below forecasts of 2.5%. Consumer spending, which accounts for more than two-thirds of US economic activity, slowed from 3.3% to 2.5%. This was mainly due to a decline in goods consumption (-0.4% vs. 3%), while spending on services grew faster (4% vs. 3.4%). The latest quarterly consumer data were largely affected by the post-holiday pullback at the onset of 2024, with retail sales recovering towards the end of the quarter. On the trade front, exports slowed sharply (0.9% vs 5.1%) while imports surged (7.2% vs 2.2%).
Worth keeping in mind is the fact that it is the first reading and advance data are often revised significantly, and some of the downside surprise was driven by the volatile trade and inventories components, some of which will likely unwind this quarter.
Finally, on Friday, we had the Fed’s preferred inflation gauge – personal consumption expenditures (PCE) price index. It came in at 0.3% last month, matching the unrevised gain in February. Monthly inflation readings of 0.2% over time are necessary to bring inflation back to target.
Goods prices inched up by 0.1% as increases in the costs of gasoline, clothing and footwear were partially offset by a decline in prices of motor vehicles and parts. Services prices rose 0.4%, up from 0.3% in February. This was charged by a 0.5% increase in the cost of housing and utilities, which include rents. Rents have remained sticky even as the supply of apartments has increased. More timely measures (such as the Cleveland Fed Repeat Rent Index) imply cooling rent inflation will filter into the data this year.
PCE Inflation was 2.7% year-on-year after advancing 2.5% in February.
Corporate America’s spiderweb to be dusted away?
In the US, it is estimated that some 30 million workers (around 19% of the 158 million workforce) are subject to a non-compete agreement in one form or another. These clauses can keep workers stuck in a job because they are forbidden to work for a competitor for extended timeframes or for another company within a given radius. Originally designed to protect companies’ trade secrets, non-competes are no longer exclusive to sensitive industries like big pharma or software development. They have spread across the US economy, filtering down to affect even fast-food workers, with employers using them as a tool to deter staff from quitting and minimise hiring costs in a tight labour market.
On Tuesday last week, however, the US Federal Trade Commission voted to ban non-compete agreements across the US, in a bid to avoid wage suppression and protect innovation. The ruling now faces legal challenges from the business community which could hinder its application.
If it does go ahead unimpeded, the ruling will have far-reaching implications for the labour market, with employers essentially being shoe-horned into improving pay and working conditions if they want to retain employees, rather than locking them in with a non-compete. It also risks slowing the battle against inflation and the Fed’s unofficial target of getting wage growth back down to around 3%.
Economic calendar for the week ahead
Monday – Eurozone Economic Sentiment (April). Germany and Spain Inflation Rate (Preliminary, April).
Tuesday – Eurozone GDP Growth Rate (Flash, Q1), Inflation Rate (Flash, April). Germany Retail Sales (March). China NBS and Caixin Manufacturing PMI (April). Japan Retail Sales (March), Industrial Production (Preliminary, March).
Wednesday – US ISM Manufacturing PMI (April), JOLTS Job Openings (March), Fed Interest Rate Decision. Japan Consumer Confidence (April).
Thursday – US Balance of Trade and Factory Orders (March).
Friday – Eurozone Unemployment Rate (March). France Industrial Production (March). US Non-Farm Payrolls, Unemployment Rate, ISM Services PMI (April).