MarketMinder Europe provides our perspective on current issues in financial markets, investing and economics. Our goal is to analyse key topics in an entertaining and easy to understand manner, helping you see the news of the day in a unique perspective.
Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
Is China’s economic recovery going into reverse? After April’s monthly indicators showed slower-than-expected growth, May’s official Purchasing Managers’ Indexes (PMIs, monthly surveys that track the breadth of economic activity) inspired more pessimism amongst financial commentators we follow. In the month, manufacturing’s contraction deepened from 49.2 to 48.8 and services slowed from 55.1 to 53.8 (readings over 50 indicate expansion, below 50, contraction).[i] In turn, headlines in publications we cover questioned China’s post-pandemic reopening bounce, arguing the expected boost is fizzling. But in our view, China is following a pretty normal reopening course: returning to long-term trends after an initial, short-lived boom, with the boom getting smaller in each cycle of lockdown to reopening. Perhaps some investors’ projections were too high entering this spring, but with pessimism quickly returning now, we think a slow-growing China will likely be fine for stocks.
In our view, most of Wednesday’s PMI commentary lacked meaningful long-term context. The articles we read looked back, but only to 2020, comparing now to the rebound from the first wave of lockdowns.[ii] Then, manufacturing stayed positive for over a year before slipping back into contraction as the autumn 2021 COVID wave prompted fresh restrictions.[iii] When the rebound from that and successive waves waned, commentators we follow blamed the COVID recurrences in Shanghai and other major metro areas—seemingly setting expectations for a lasting boom now that China has abandoned Zero-COVID.[iv]
That expectation has long seemed a bit off base to us, as our research suggests it differs from the developed world’s experience. In the US, UK and eurozone, the first reopening brought the biggest boom simply because it followed the most draconian lockdown—and when society hadn’t learned how to live with restrictions and keep them from hampering commerce as severely.[v] That is key context, in our view. When restrictions returned later in 2020 and 2021, activity didn’t fall as much as in February and March 2020, so we don’t think there was as much ground to regain when things reopened.[vi] Accordingly, the subsequent rebounds were smaller and shorter, with longer-term trends reasserting themselves swiftly.[vii]
Faced with better-than-expected April US consumer spending growth in a widely watched Bureau of Economic Analysis (BEA) report released Friday, coverage we read gravitated to storm clouds supposedly gathering.[i] Their focus, which we don’t think is particularly surprising: inflation and how it has challenged many households’ finances over the last year and a half. Overall and on average, America’s consumer spending has held up despite price pressures, suggesting to some commentators we follow that US consumers must be heaping on debt, setting up trouble later. But a look at US spending, income and household finance data argues otherwise, in our view. For investors, we think the negative attitude toward fine data underscores the prevailing pessimism of disbelief, which fosters young bull markets (prolonged, broad stock market appreciation).
Following a slight -0.2% m/m February dip and flat March, inflation-adjusted or real personal consumption expenditures (PCE, the broadest measure of US consumer spending and 71% of gross domestic product, GDP) rose 0.5% in April, adding to evidence the economy is off to a good start in Q2.[ii] (Exhibit 1) We found Americans’ consumer spending was strong across the board. Services (62% of PCE) not only accelerated to 0.3% m/m growth, but goods expenditures jumped 0.8% after detracting for two months.[iii] Whilst backward looking, broad-based expansion in US GDP’s largest segment suggests to us recession (an economy-wide decline in activity and output) was likely not at hand in early Q2.
Exhibit 1: US PCE Continues Expanding
Source: US Federal Reserve Bank of St. Louis, as of 26/5/2023. PCE goods and services, January 2002 – April 2023.
Wednesday, the Office for National Statistics (ONS) published its widely watched Consumer Price Index (CPI, a government-produced index tracking prices of commonly consumed goods and services)—which has been front and centre for many observers we follow for nearly two years. And in April, that seemingly continued, as headline inflation slowed—but not as much as publications we read anticipated—and core inflation actually accelerated.[i] Predictably, we saw the data lead to many forecasts from commentators we follow of further Bank of England rate hikes to come, calls for more government action to rein prices in—and a general deepening in investor malaise. These data aren’t terribly pretty, but in our view, whilst it may take time to develop, we think there is ample room for positive surprise on UK prices from here.
April’s headline CPI slowed bigtime—from 10.1% y/y in March to 8.7% in April, -2.4 percentage points below October 2022’s peak.[ii] But this seemingly big positive was muted by the fact almost every observer we follow knew a sharp improvement was coming—largely tied to energy prices. The government, of course, caps household energy prices. Last year, it ratcheted those caps up bigtime, as energy prices rose—but with energy prices falling, that didn’t repeat.[iii] As energy prices swiftly declined globally, the year-over-year household energy inflation rate in the UK slowed dramatically (from 85.6% y/y in March to 24.3% in April).[iv]
Furthermore, even last month’s big CPI slowing missed observers’ forecasts. Analysts had anticipated prices to decelerate to 8.2% y/y in April.[v] Just a couple weeks ago the Bank of England (BoE) said it anticipated 8.4%.[vi] Why the miss? Many analysts noted food prices remain hot, rising 19.0% y/y, a microscopic slowdown from 19.1% in March.[vii] But even beyond this, core prices—which exclude food, energy, alcohol and tobacco—actually accelerated from 6.2% y/y to 6.8%, as services prices jumped, registering the hottest rate since March 1992.[viii] On a month-over-month basis, UK prices rose by a quick 1.2% m/m in April, although the ONS did point out that (hot) monthly rate was half of April 2022’s.[ix]
Thursday morning, Germany released revised Q1 gross domestic product (GDP, a government-produced measure of economic output), which flipped a flat quarterly read to contraction—the second-straight quarterly dip.[i] Headlines we follow seized upon this as a revision to recession (a protracted, broad decline in economic activity), which we guess is to be expected. However, those data are quite old and unsurprising, in our view. Moreover, earlier this week S&P Global released their May flash purchasing managers’ indexes (PMIs), suggesting most major developed nations continued growing into Q2.[ii] May’s readings didn’t yield much that is altogether new, but we think they offer more evidence the global economy has been faring better than the consensus views we read at the beginning of the year.
PMIs are monthly business surveys, in which readings above 50 imply expansion. They have their limits—e.g., they indicate only how widespread growth or contraction is, not the magnitude—but we think they are amongst the most timely gauges of recent business activity. Germany is a good example, in our view. Q1 composite PMI readings (which combine manufacturing and services) read 49.9, 50.7 and 52.6 in the quarter’s three months.[iii] Based on our research, those mixed, narrowly contractionary and expansionary readings are consistent with the mild contraction in Q1 GDP.
May’s flash readings, which reflect approximately 85% – 90% of total responses, had some notable takeaways: Japan, for instance, reported the strongest rise in private sector activity in nearly a decade.[iv] The country’s services PMI registered its best-ever reading, with record expansions in total new business, exports and outstanding business—with many respondents crediting the resumption of domestic and international tourism as COVID-related disruptions waned.[v] The strong report may foment further investor optimism towards the Land of the Rising Sun, though we think it is easy to overstate the country’s prospects.
Economic reality exceeding fears is the primary force underlying global stocks’ rally since last summer, in our view.[i] One prominent example: Europe’s energy situation. Since mid-2021, the Continent has faced a sequence of energy issues, ranging from a dearth of wind early—which drove utilities to shift to natural gas—and then, of course, its dependence on Russian energy contributing to ginormous price spikes and worries of rationing and blackouts.[ii] Energy costs hit eye-watering levels: European natural gas prices registered an all-time high in October 2021—and would triple in under a year—whilst global oil prices rose to their highest levels in more than a decade.[iii]
These developments convinced many experts we follow that Continental energy shortages would drive a deep recession.[iv] Yet as we approach summer 2023—and with European gas prices down to their lowest level in two years—the energy situation is looking decidedly less dire, in our view.[v] To us, this is a shining example of reality turning out better than feared, which has propelled a strong eurozone stock market rally since last fall.[vi] Conditions still aren’t pristine—but our research shows they needn’t be for stocks, a key lesson to keep in mind.
A big reason reality has turned out better than many financial commentators we follow projected: Russia lost its energy leverage over Europe, as the Continent found other sources of natural gas. As Exhibit 1 shows, the European Union (EU) has been shifting away from Russian gas, finding supply from other nations, including Norway, America, Algeria and Qatar. (Exhibit 1)
Broad Japanese equity indexes rose to multi-decade highs last week.[i] Coupled with some very high profile investors recently taking an interest, the climb is garnering a lot of attention.[ii] Whilst an interesting observation, we think more in-depth perspective is in order before loading up on Japan.
As Exhibit 1 shows, two of Japan’s most-followed indexes in publications we cover—the Nikkei 225 and TOPIX—are hitting 33-year highs. Those highs were the culmination of the epic late-1980s’ bubble, which Japanese markets have yet to regain.[iii] They also preceded the country’s infamous lost decade(s).[iv]
Exhibit 1: Japanese Equities Hitting Multi-Decade Highs in Yen
Source: FactSet, as of 22/5/2023. Nikkei 225 and TOPIX price indexes, 1/1/1970 –19/5/2023. Presented in Japanese yen. Currency fluctuations between the pound and yen may result in higher or lower investment returns.
America’s University of Michigan (U-Mich) released the preliminary May results for its widely watched consumer sentiment survey last week. Perhaps unsurprisingly, given the rampant handwringing in financial publications we follow over the country’s West Coast regional banks and the simmering standoff in America’s Congress over raising the country’s statutory debt limit, the index fell to a six-month low.[i] But today’s downbeat consumers don’t necessarily foreshadow things to come, in our view, as the U-Mich survey’s history illustrates.
The U-Mich consumer sentiment index fell to 57.5 from April’s 63.5, below expectations and the weakest reading since last November.[ii] Survey readings have been broadly dour since February 2020, which we think is likely tied to the first COVID restrictions starting to take effect in developed nations and the global bear market.[iii] Responses have also persistently exhibited a noticeable partisan divide—highlighting politics’ effect on people’s moods, in our view. For example, those who identified as Republican have consistently responded more negatively than those who identified as Democratic since November 2020, when Democratic candidate Joe Biden won the presidential election. (Exhibit 1) But regardless of party affiliation, U-Mich’s gauge has yet to return to pre-pandemic levels.
Exhibit 1: U-Mich Consumer Sentiment Index Since 2018
The UK’s Office for National Statistics (ONS) published its first estimate for Q1 GDP (gross domestic product, a government-produced measure of economic output) Friday, showing 0.1% q/q growth.[i] Many outlets we follow portrayed this as lacklustre, and we agree it isn’t stellar in isolation. But against long-running and widespread forecasts for a recession (a protracted, economy-wide decline in economic activity), we think it likely amounts to a positive surprise. And that is all stocks need to rise, in our view.
Whilst quarterly headline growth was meagre, all major output categories rose.[ii] Services and production each grew 0.1% q/q and construction climbed 0.7%.[iii] Within services—the lion’s share of the UK economy—information and communication rose 1.2% q/q and contributed the most to its category.[iv] Manufacturing’s 0.5% q/q growth led production, offsetting mining and quarrying’s -5.0% drop, whilst utilities output was flat.[v] On the expenditures side, household consumption rose 0.1% q/q and gross fixed capital formation jumped 1.3% with business investment, its largest subcategory, up 0.7%.[vi]
But monthly GDP data show growth was frontloaded last quarter.[vii] After January’s 0.5% m/m gain, GDP was flat in February and then dropped -0.3% in March.[viii] Whilst production grew 0.7% m/m in March, services fell -0.5%, with consumer-facing services in particular down -0.8%.[ix] The ONS noted an “exceptionally wet March 2023 (the sixth wettest March since 1836)” and strikes, aka “industrial action,” likely had an impact.[x] Anecdotal evidence suggests wet weather hit retail sales, food and beverage services, sports and recreation activities and some kinds of construction services like equipment leasing.[xi] And whilst we aren’t passing any judgment on the strikes, they appeared to affect output in the health sector, civil services, education and the rail network.[xii]
Editors’ Note: MarketMinder Europe is politically agnostic. We prefer no party nor any politician and assess developments for their potential economic and market impact only.
Between Turkey and Thailand, it appears Emerging Markets (EM) investors have bought a lot of hope in recent days. Turkish stocks soared 12.5% last week—including a 9.2% jump Thursday—as investors seemingly grew optimistic voters would oust its longtime leader, President Recep Tayyip Erdogan, at Sunday’s election.[i] Meanwhile, in Thailand, pro-democracy parties won a combined majority in the lower house Sunday, raising hopes that the military junta will soon cede power.[ii] But now in both places, we think reality is setting in. In Turkey, local stocks fell -8.2% Monday after Erdogan beat pollsters’ expectations, teeing up a 28 May runoff in which he seems to have an edge.[iii] Thai stocks fell, too—though by not nearly as much—despite commentators’ cheer over the outcome.[iv] We see lessons here for investors, regardless of whether you dabble in EM stocks: Hopes and possibilities are a flimsy basis for an investing thesis, in our view.
Given Erdogan has won past elections amidst ostensibly insurmountable odds—including currency crises, rapid inflation and severe unrest—it might appear odd that markets seemingly spent last week pricing his defeat.[v] Polls might have pointed to a close contest, but observers have long seen the telltale signs of ballot-stuffing and other shenanigans in Turkish elections.[vi] Yet optimistic commentators we follow have argued that a fractured opposition was the main roadblock to beating Erdogan, so when several opposition parties coalesced around a single challenger—Kemal Kilicdaroglu—and polls gave him a slight lead, investors apparently got excited.[vii] Observer enthusiasm reached fever pitch Thursday when another challenger, Muharrem Ince, withdrew at the last minute, further consolidating the opposition vote.[viii] As investors seemingly added Ince’s polling percentages to Kilicdaroglu’s, markets appeared to price in Erdogan’s defeat.[ix] To paraphrase the legendary investor Benjamin Graham, in the short term, markets are like voting machines—a comparison with perhaps more meaning than normal here—and they can sway on popularity and hype.
Labour markets are bustling in North America based on April employment data, released last week. US job growth handily beat expectations, whilst Canada is enjoying its longest run of monthly jobs gains since 2017.[i] Considering the two North American nations comprise more than 70% of the developed world stock market, economic trends there receive attention globally.[ii] The April jobs reports are great, but we don’t think it is necessary to draw broader lessons from them—our research has found backward-looking labour data tell you little about future economic conditions or inflation (broadly rising prices across the economy).
In the US, April nonfarm payrolls rose by 253,000 following March’s 165,000 gain, whilst the unemployment rate ticked down from 3.5% to 3.4%.[iii] Hourly earnings—which many observers we follow monitor due to wages’ purported (and misperceived, in our view) connection to inflation—accelerated from March’s 0.3% m/m growth rate to 0.5%, the fastest since March 2022.[iv] Canada’s April Labour Force Survey told a similar story: Total employment rose by 41,000 after March’s 34,000 addition, holding the unemployment rate at 5.0%—unchanged since last December.[v]
April’s numbers extend recent trends in both nations: Employment levels and the unemployment rate have recovered from the COVID lockdown hit and continue to improve. (Exhibits 1 – 2)
Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
This article reflects the opinions, viewpoints and commentary of Fisher Investments MarketMinder editorial staff, which is subject to change at any time without notice. Market Information is provided for illustrative and informational purposes only. Nothing in this article constitutes investment advice or any recommendation to buy or sell any particular security or that a particular transaction or investment strategy is suitable for any specific person.
Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.
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