Economic improvements in major developed economies set a positive tone for markets in April 2023 despite US banking challenges.
Better than feared
After a volatile first quarter, improvements in economic gauges for the major developed economies set a positive tone for markets in April, despite ongoing challenges in the US banking sector. PMI data reinforced positive momentum in services activity globally, which is providing ballast for a weaker manufacturing backdrop. A recovery in service activity also supported a positive quarterly GDP print for the Eurozone, be it at 0,1%. China Q1 GDP printed at 4,5% yoy, surpassing consensus expectations of 3,8%. Local agencies pointed to improved domestic demand, with retail sales printing growth of 10,6% over the year to March. A doubling of the country’s trade surplus (largely driven by double digit growth in exports) from a year earlier also illustrates the meaningful role of reopened borders.
Decline in energy prices has been a key driver for the moderation in headline inflation figures thus far and, as such, warrant close monitoring. OPEC+ announced surprise production cuts in April, a move that many believe is intended to achieve an oil price of $80 a barrel, which could serve as a floor for this market. The oil price ratcheted up to $87 after the announcement before declining in the second half of the month, and ultimately ending the month down c.0,3%. The oil price is still down 7,4% since the start of the year and 27,3% lower over the year to April.
US headline inflation moderated to 5,0% in March from 6,0% in the previous month. US producer price inflation also declined to 2,7%, with both sets of figures benefitting from lower energy prices. While food and shelter inflation remain high, the monthly increase in the shelter component of inflation slowed to the smallest gain this cycle. The US Federal Reserve’s minutes reflected on high levels of inflation and a resilient labour market but recognised that tighter lending conditions after the banking crises would pose a risk to growth. US Q1 GDP came in at 1,1% from 2,6% the previous quarter. Softer economic data in upcoming months may reinforce market expectations that the US Fed may be nearing a pause. Regardless, a high level of data dependence in policy making is likely to keep pricing volatile.
UK headline CPI printed at 10,1% in March, which is higher than expected but still lower than the previous month. Eurozone inflation declined to 6,9% from 8,5% in March, driven mainly by lower energy costs. Core inflation increased in Europe and remained steady in the UK.
Although US corporate earnings are in decline year on year, the majority of companies are still delivering positive surprises this earnings season. Some will argue the bar was set too low and therefore the results are merely better than feared. As first quarter results are released, the picture is likely to be more mixed – but may provide some insight into the underlying resilience of the different regions globally.
Risk assets recovered on more constructive economic data, with most developed equity markets gaining ground over the month. The US underperformed other developed markets peers in April.
First quarter earnings from several major US banks surpassed expectations, with the larger banks benefitting from increased deposits during the March banking crises. Results and forward guidance from regional banks reflected underlying tension in the sector. In early May, JP Morgan acquired First Republic, the largest bank casualty in the sector to date. Despite improving economic data from China, geopolitics saw the Hang Seng decline 2,4% over the month, while the MSCI Emerging Markets index lost 1,1%.
With wage data from Europe and the UK showing upward pressure, bond markets reflected a more nuanced picture in April, with European and UK bond yields moving higher as markets price relatively more hawkish monetary policy in these regions, while the US 10-year bond yield declined to 3,4% by month-end. Falling US yields helped US Treasuries outperform other sovereign bonds. The Bloomberg Global Aggregate Bond index returned 0,4% over the month and 3,5% year to date. Within the fixed income universe, investment grade credit delivered strong relative performance over the month. The US dollar depreciated by 0,8% on a trade weighted basis in April, leaving the greenback 1,8% weaker year to date.
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