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.
Editors’ Note: As always, MarketMinder Europe is politically agnostic. We favour no politician nor any party and assess developments for their potential economic and market impact only.
UK gross domestic product (GDP) grew more than economists expected in January, and we observed an interesting occurrence: Many economists we follow started rethinking all those UK recession forecasts.[i] Not long ago, the Bank of England (BoE) and a host of others projected the UK would enter recession late last year and contract through 2023 (a recession is a broad decline in economic activity).[ii] Now we know that in addition to eking out a flat Q4, UK GDP grew 0.3% m/m in January—beating analysts’ consensus expectations for 0.1% and starting the year on a strong note.[iii] Seems to us people are starting to catch on to what UK stocks appear to have been signalling for months.[iv]
It may be tempting to dismiss January’s growth as the product of a few one-off factors. The English Premier League, which took a lengthy break during the World Cup, was back in full swing—boosting all the activity that comes with match attendance and general revelry.[v] The transit strikes that hobbled several industries in December eased up a bit, and falling absenteeism boosted educational output.[vi] We saw some analysts note that without these one-off contributions, growth would have been flat. Fair enough, but UK monthly GDP has suffered skew from a host of one-offs since the late Queen’s death and funeral pushed some activity from September to October last year.[vii] Similarly, December’s drop stemmed partly from the aforementioned Premier League break and labour action.[viii] We think the main lesson here is not to get hung up on monthly GDP regardless of whether it is good or bad. Monthly data have too much short-term variability to glean a meaningful takeaway, in our experience.
Do America’s rising auto loan delinquency rates make consumer debt trouble automatic, with potential global reverberations? Commentators we follow suggest they are an early tell an economic wreck awaits. However, we think putting the data in proper context shows why consumer debt isn’t about to make the US economy’s engines sputter out—making this a brick in global stocks’ proverbial wall of worry, in our view. Take a look under the bonnet with us!
Those commentators seeing a looming credit crisis say the recent uptick in auto loan delinquencies is a sign of strapped American households—a canary in the coal mine for other consumer debt like credit cards and mortgages. We find this stems from long-running concerns that auto lending has become the new subprime (a category of borrowers with poor credit history) mortgage—echoing the mid-2000s’ boom in loans to US homebuyers with questionable creditworthiness, on which most coverage we read pins the global financial crisis in 2007 – 2009.[i] The alleged data signalling credit chickens coming home to roost: Used automobile trade-ins show a rising trend in negative equity—where the amount of debt left on a car exceeds its value.[ii] Because of the combination of sky-high car prices’ cooling and rising auto loan rates, more people are underwater on their cars.[iii] Buyers have taken out bigger loans to finance their vehicle purchases—sometimes stretching them out to seven years, versus an average of six—but with used car prices now sliding, they increasingly owe more than their car is worth.[iv]
Delinquency rates on these loans are now rising.[v] Cox Automotive reports loans 60+ days past due were up 20.4% y/y in January to 1.89% of all auto loans, the highest rate since 2006.[vi] Some reports we see argue this indicates outsized car payments are more unaffordable, competing with other household demands—e.g., food eating into budgets—and higher delinquency rates are evidence the strain is showing.[vii]
New month, new batch of business surveys. We highlighted February flash purchasing managers’ indexes (PMIs, monthly surveys that track the breadth of economic activity, where readings above 50 indicate expansion, below 50, contraction) for the US, UK and eurozone recently, and we noted that we don’t think the final readings revealed much new insight. But on Friday, S&P Global released a spate of expansionary services PMIs. February growth, particularly out of the Asia and Pacific region, suggests activity from a big part of the global economy is likely rebounding—an overlooked positive, in our view.
Most of S&P Global’s services PMIs out of the Pacific topped 50 in February—implying expansion. (Exhibit 1)
Exhibit 1: Services PMIs Out of the Pacific
Editors’ Note: As always, MarketMinder Europe is politically agnostic. We favour no politician nor any party and assess political developments for their potential economic and market impact only.
Alas, Brexit. Three years on (and counting) and it still tends to hogs all the air in the room. This time, commentators we follow seemed completely focussed on Monday’s news that the UK and EU agreed a fresh deal governing trade with Northern Ireland, which hopefully resolves many of the frustrations we have observed on all three sides. This is no doubt welcome news for many, although we think its significance is probably more political than economic, and it likely still has plenty of political gridlock to clear. But in our view, more economically significant happenings flew under the radar Monday—namely, some small energy-related developments. We don’t think they are likely to pack a big punch for markets, but in our view, understanding them now may provide investors with some helpful context for understanding data that roll in down the road.
We don’t wish to dismiss the Brexit deal’s importance, mind you. The Northern Ireland Protocol, in its original form, was nice on paper but seemed unworkable in practice, according to the vast majority of analysts and market participants we follow.[i] It did its job of enabling the government at that time to get Brexit done whilst complying with the Good Friday Accords. But in practice, keeping trade free and frictionless on the island of Ireland and between Northern Ireland and Great Britain proved impossible under the original solution. There was no simple system for designating British products for sale in Northern Ireland only, essentially requiring all goods entering from Great Britain to comply with EU customs rules on the mere possibility that they could be re-exported. Hence, there was a de-facto border across the Irish Sea that resulted in many headaches, according to coverage we read—and deprived Northern Irish people of British bangers and other delicious chilled meats.
Housing markets in several major economies have had a rough year as financial headlines we monitor recounted, and some have speculated about potential spillover effects to other parts of the economy. However, we don’t think falling home prices necessarily spell trouble for the global economy or stocks. Let us run through a global look at the data—and explain why we don’t see this as a big concern from a macroeconomic point of view.
Starting in the US, existing home sales fell -0.7% m/m in January—their 12th straight monthly contraction—to an annualised pace of 4 million, the weakest since October 2010.[i] Homes have also been sitting on the market for longer—33 days on average in January 2023 compared to 19 days a year earlier.[ii] This comes despite inventory that, whilst up 15.3% y/y in January, was still historically low at 980,000 homes for sale.[iii] Price rises have slowed on a year-over-year basis, and they are likely falling as of late, too, with the comparison to prices 12 months ago obscuring more recent declines.[iv]
The trend is similar in other developed nations. In the UK, house sales fell -3.0% m/m in January, the worst start to a year since 2015.[v] Homes there are also spending more time on the market, with one in seven going six months before being sold, the highest proportion since February 2015.[vi] Canadian January home sales slipped -3.0% m/m, and prices were down an 11th straight month, according to the Canadian Real Estate Association.[vii] In Australia, new home sales fell by -4.6% m/m in December, and property data firm CoreLogic found that, in volume terms, unit sales rose in just 2 of 25 regional markets in the 12 months to last November.[viii] On the Continent, Sweden has been one of the hardest-hit housing markets globally, and we have seen economists argue the tough times will continue.[ix]
Winter may still be raging, but it looks like there may be some hints of green shoots … in the global economy, if not the soil. Yes, Tuesday’s batch of S&P Global’s February flash purchasing managers’ indexes (PMIs) showed service sectors in the US, UK and eurozone accelerating enough to pull the composite PMIs, which combine services and manufacturing, into expansion territory for the first time in months.[i] For some time, we have suspected that global stocks’ rally since mid-June was the market pricing in the high likelihood the global economy would perform better than many analysts we follow projected as 2023 unfolded.[ii] We think it is still too early to say with certainty that a bull market (a long period of generally rising equity prices) is indeed underway following last year’s decline, but PMIs are one more piece of evidence supporting the rally, in our view.[iii]
Exhibit 1 shows composite PMIs for the US, UK and eurozone over the past year. All had a grim second half of 2022, in our view, with both services and manufacturing indicating contraction the majority of the time. Last month, however, the eurozone flipped above 50, the dividing line separating growth from contraction.[iv] Now the US and UK have mirrored the move.
Exhibit 1: PMIs Are Back in Expansion
Europe’s energy crisis has dominated the headlines of financial publications we follow, with many commentators arguing the fallout would disproportionately roil Germany’s mighty industrial sector—hamstringing a big driver of the Continent’s largest economy.[i] But against this mixed backdrop, German stocks have been rallying since late September—despite data that largely show the industry struggling.[ii] In our view, this is a reminder stocks look forward. In this case, we think they seemingly pre-priced heavy industry’s weakness—and moved on—before any improvement was clear.
We wrote earlier this month about German GDP’s Q4 contraction, and whilst that initial estimate doesn’t provide a component breakdown, statistics agency Destatis noted private consumption expenditure fell on a quarterly basis.[iii] Detailed results will come out on 24 February, but some recently released, narrower gauges provide colour in the meantime. On the factory front, December industrial production fell -3.1% m/m on a price-adjusted basis, and weakness was widespread.[iv] Manufacturing (-2.1%) and energy production (-2.3%) both slipped whilst energy-intensive industries’ production—which fell for most of the year—contracted sharply (-6.1%).[v] December factory orders rose 3.2% m/m on a price-adjusted basis, but the positive headline number comes with a caveat: Volatile large-scale orders (e.g., for engines and turbines or spacecraft) skewed the result.[vi] Removing this bouncier category, orders contracted -0.6%, signalling flagging demand.[vii]
Rounding out the data, the January Consumer Price Index (CPI) rose 8.7% y/y, a tick higher than December’s 8.6%.[viii] On a harmonised basis (which EU nations produce in addition to national CPI measures to facilitate comparison across the bloc’s member nations) prices rose 9.2% y/y, slowing from the prior month’s 9.6% rate.[ix] Now, there were some complicating factors likely affecting recent prices, as the government provided relief on households’ natural gas bills in December and an electricity price cap took effect in January—though we won’t have those details until the next estimate.[x] Destatis didn’t provide January preliminary results for individual product groups, as the statistics agency shares only headline numbers when making changes to its methodology—as was the case this year.[xi]
UK gross domestic product (GDP, a government-compiled economic output measure) was flat in Q4, defying economists’ consensus expectations for a -0.3% q/q dip—which would have been its second straight quarterly decline.[i] Therefore, most coverage we follow suggested the UK just narrowly avoided recession (broad economic contraction), as many see two consecutive quarterly contractions as defining one. Many nevertheless say recession is still likely, including the Bank of England (BoE) and International Monetary Fund (IMF).[ii] Perhaps. But given the widespread and high-profile forecasts for one, we don’t think it would surprise much, likely sapping its effect on stocks.
After GDP fell -0.2% q/q in Q3—due partly to the national mourning period for Queen Elizabeth and bank holiday for her funeral—the economic consensus expected a Q4 contraction would confirm the long-projected recession is underway.[iii] The Office for National Statistics’ (ONS) initial estimate for no growth, whilst better than estimated, didn’t really counter the pessimism we observed from commentators we follow. Several outlets we cover were quick to note the UK economy “flatlined” last quarter, pausing the downturn, as the BoE forecasts a -0.5% GDP decline in 2023.[iv] The IMF predicts the UK will be the only major economy to contract this year.[v]
True enough, Q4’s zero-growth doesn’t preclude a UK recession. If Q4 stays flat through the ONS’s later revisions, a Q1 contraction could confirm a lengthier slide in output. Although conventional wisdom commonly considers two consecutive quarterly GDP declines as recessionary, the UK doesn’t officially have a definition.[vi] In the US, though, the National Bureau of Economic Research—America’s recession arbiter—declared a recession in 2001 without a two-straight-quarter GDP dip, for example.[vii] Meanwhile, the ONS also notes UK GDP, whilst close, remains below its pre-pandemic peak level.[viii]
Japan reported Q4 gross domestic product (GDP, a government-produced measure of economic output) early Tuesday, rounding out major developed nations’ reports—and it was a bit anticlimactic, in our view. The 0.6% annualised rise rebounded from Q3’s -1.0% slide, but it didn’t recoup the entire decline.[i] It also missed analyst expectations for a 2.4% rise as business investment fell and exports, whilst up, disappointed.[ii] Headlines in publications we follow couched the data as a puzzle for the Bank of Japan’s (BoJ) incoming policymakers, including newly nominated (potential) head Kazuo Ueda: How can they wind down so-called monetary easing without derailing a fragile recovery? We think this distracts from the larger point: Q4 didn’t signal any new developments in Japan. Rather, it merely confirmed the country’s long-running challenges, which stocks are well aware of, in our view.
According to our review of its economy, Japan has long struggled with weak domestic demand, tied largely to Corporate Japan’s sluggishness. We see a number of reasons for this, including structural factors (e.g., slow-moving labour reform progress) and monetary policy, which flattens the yield curve (a graphical representation of a single issuer’s interest rates across the spectrum of maturities)—and keeps a lot of legacy companies on artificial life support, preventing the economic force known as creative destruction from sweeping out older, less-viable businesses and making the way for new, dynamic players.[iii] This all manifests in an economy that our historical analysis shows gets by on household spending, government activity and exports, with business investment mostly floundering. Last year, the country faced added headwinds from the weak yen, which raises import costs, and higher energy prices—also exacerbated by the weak yen, given Japan imports much of its fuel.[iv] Add in lingering COVID restrictions, and it was a rough year.
We think Q4’s GDP data were a microcosm of this. Household spending rose 2.0% annualised, accelerating nicely from Q3’s 0.1%.[v] Government spending and investment combined accelerated to 1.4%.[vi] Exports grew but slowed from 10.4% to 5.7% as the yen strengthened, reducing overseas revenues after conversion.[vii] Imports, meanwhile, fell -1.6% after jumping 24.0% in Q3—both likely skewed bigtime by currency swings.[viii] But business investment fell -2.1%, and inventories also detracted, which analysts tied to depleted stockpiles of automobiles and raw materials.[ix] Some good and some bad and overall mediocre results in a quarter that most observers we follow anticipated would get a big boost from COVID restrictions lifting.
As stocks rallied from June’s low, slowing inflation, modestly improving global economic forecasts and better-than-expected European energy supply captured most attention from commentators we follow.[i] But we also see another force quietly working in the background: the bond market. Not as a driver of the stock market, mind you, but a companion. Our research suggests both fell together on conjoined inflation and rate hike fears last year.[ii] But since autumn, both have flipped and rallied in tandem.[iii] As with stocks, bonds’ low will be clear only in hindsight. But we think the rally thus far looks consistent with the 2023 rebound we expect.
Exhibit 1 shows UK Gilts, investment-grade corporates and high-yield bonds in total return terms (price movement plus yield) since 2020’s end—capturing their full downturn. Gilts and investment-grade corporates endured a full bear market, falling more than -20% from their high.[iv] High yield bonds didn’t breach this threshold, but they came close. However, like stocks, all three have jumped from their respective lows, with corporates and high yield leading.
Exhibit 1: Bonds Are Bouncing, Too
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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